- Zipcar's customer-friendly and disruptive business model is what makes it unique. First, it leverages accessibility, making its cars available closer to where people live or work and need access to a vehicle -- addressing one of the biggest pain points of car renting. Second, the company allows its members to use a car as and when required, providing true flexibility.
- Zipcar has seen high double-digit growth in its top line over the past year. This is aided by increased usage and a rise in membership. Toward the end of last year, membership increased by 25% to 673,000 members.
- Zipcar sure has increased its membership over time, but it has also done a good job at member retention. A year ago, the company increased its annual membership fee from $50 to $60, yet has not yet suffered from a decline in loyalty. This reflects a strong demand for Zipcar's offerings.
- Thin margins are never a good sign. A fall in Zipcar's gross and operating margins in the last reported quarter as compared with the prior-year period reflects high costs. The company ended the quarter having 8% more vehicles as compared to the year-ago period, while its fleet operation costs shot up by nearly 23%.
- Each time Zipcar decides to enter a new market, it has to make an upfront investment in vehicles. The company's plans to expand its presence into cities such as London and Barcelona will lead to heavy expenditure -- something that will weigh on its profitability in the near term.
- Zipcar's penetration is not very high, which translates to a big market waiting to be tapped. Apart from expanding in the home market, Zipcar will also operate in newer European markets such as Spain. Given the economic difficulties in the European markets, people might warm up to the idea of car sharing quite quickly.
- At home, rising fuel costs and a slow recovery will continue to be beneficial as people shift to car sharing instead of buying new cars to save on precious dollars.
- Other car rental companies such as Hertz
(NYSE: HTZ)and Avis (NYSE: CAR)that already have a strong foothold in the car rental industry pose a threat to Zipcar's business. Such companies' entry into the car-sharing business could potentially take a chunk out of Zipcar's top line.
- While rising fuel costs will push people toward Zipcar, on the flip side, this will also pinch Zipcar's already-floundering margins.
Last, but not the least, America's love for cars truly doesn't need any explanation!
The Foolish bottom line
After weighing the pros and cons, I think Zipcar's interesting business model and fast growing revenue, helped by a slow-moving economy, are likely to achieve long-term success, offsetting challenges such as pressured margins and high investment costs. Add Zipcar to your watchlist to watch this stock closely.
Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Zipcar and Hertz Global Holdings. Motley Fool newsletter services have recommended buying shares of Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.