Ever driven down the street with the emergency brake still engaged? Your executive class Mercedes lurches forward as you frantically search for an explanation. Yeah, we've all been there, and lately the brakes have been fully deployed on Zipcar's (Nasdaq: ZIP) stock. Since I gave it a thumbs-up on CAPS in early November, the share price has dropped more than 20%.

Perplexed, I felt the need to look under the hood and see what's going on. Here's what I found.

The nuts and bolts
Zipcar came onto the scene in 2000 with a fresh approach to personal transportation -- car sharing. The company's self-service model allows users to "rent" cars by the hour or the day from locations scattered about metropolitan areas.

In some ways, the Zipcar model resembles that of retailer Costco (Nasdaq: COST); customers pay an annual fee to be part of the club. Analysts have also compared it with Netflix, another company built on collaborative consumption. Since members, known as "Zipsters" also pay a per-use rental fee, Zipcar benefits from two revenue streams. However, the emergence of well-known competitors could pose a threat to Zipcar's profitability.

What's driving Zipcar?
Zipcar's strengths lie in its first-mover advantage and potential network effect. The company's growing presence in major metropolitan areas will increase options for Zipsters, improve customer service, and entice others to join.

Zipcar currently has a foothold in 15 major U.S. cities and 250 college campuses. The company controls 50% of the car-sharing market in North America and is steering toward Europe and Asia for future growth. With 80% of the car-sharing market in London and a controlling stake in Spain's Avancar service, Zipcar's overall European market share stands at 7%.

While discussing Zipcar's potential in Asia, CEO Scott Griffith stated, "The globe is urbanizing. This is a global trend that helps increase the adoption of car sharing and other smart mobility services."

Griffith has brought a metrics-driven focus to the company, and the results have been impressive. He targets specific geographical areas, launches the car-sharing program, and creates a network effect as Zipcar spreads to new regions. Customers benefit from the network effect because they can take advantage of readily available vehicles in any city where Zipcar sets up shop.

In my opinion, the first-mover advantage and network effect will help Zipcar develop an economic moat. Warren Buffett coined this term to describe a business's ability to fend off competition. In other words, as Zipcar grows larger, the harder it is for rivals to catch up.

The stock's a wreck
Despite Zipcar's operational success, its stock has veered off the road in 2011. Sure, the Dow hit its peak right after the IPO, but Zipcar is off 50%. What's the story?

Although 2011 has been a rough year from an employment perspective, I hesitate to blame the broader economy. Zipcar's service offers car owners a chance to save cash; thus, you could argue that car sharing should be stronger in a down economy.

Well, are insiders unloading shares? Not recently.

What about the financials? Has Zipcar loaded its trunk with debt? Nope. After two notable acquisitions, the company's total debt to equity still sits at just 35%. Furthermore, from 2007-2010, Zipcar's top line has grown at an average rate of 47.7%. Finally, the company turned its first (albeit very small) profit in the third quarter, reporting net income of $0.65 million.

Could it be the competition?
Zipcar's primary competitor, Hertz (NYSE: HTZ), recently replaced its Connect by Hertz service with Hertz on Demand. Its chief rival pulled out all the stops with its Hertz On Demand service, which includes no enrollment fee, no annual membership fee, and the ability to rent cars for one-way trips. After some research, however, I believe Zipcar has the upper hand for several reasons:

  1. Location, location, location: Zipcar has more than 9,500 vehicles across the U.S. and Europe. I expected Hertz to measure up, however, upon consulting the Hertz On Demand website, I realized the company has outfitted only one city: New York City. I counted only a handful of car locations in downtown Boston, Washington, D.C., and San Francisco combined. Overall, I was unimpressed.
  2. Customer loyalty: Zipcar looks out for Zipsters. The company offers great customer service and an incredibly user-friendly app for booking reservations. That's why Zipcar's average monthly retention rates are consistently above 97%.
  3. "Business" savvy: Zipcar isn't just about young urbanites. The company works with 10,000 businesses and launched FastFleet, which will allow cities to equip their vehicles with Zipcar's reservation and management systems. The city of Washington, D.C., for example, reduced its fleet of vehicles by 17% in six months through Zipcar, and expects to save $6.6 million over five years.

Although additional competition will emerge, Zipcar has a substantial head start. Recently, even Ford (NYSE: F) endorsed Zipcar's business model, providing 1,000 cars at no cost for college campus locations. "We don't know where car-sharing is headed, but Ford wants to be a part of it," said Executive Chairman Bill Ford.

Foolish takeaway
After kicking the tires, I think this company's operational excellence will accelerate the stock price going forward. Zipcar's initial offering price was likely inflated, but that was the case with many 2011 IPOs, including Groupon, Pandora, and LinkedIn. This is a stock that I'm bullish on for the long term, especially now that its price has come down to earth.

Of course, investors need to consider other factors, which is why I encourage you to conduct your own research. I believe Zipcar will have a banner year in 2012, but our chief investment officer has his eye on another company that's creating its own economic moat. He recently disclosed his favorite stock for the upcoming year in a special report. For more in-depth analysis on a fast-growing company, click here -- it's free.