Zipcar is not a new machine, however, just a different way to use an old one. Unlike Segway, the car sharing innovator accepts that the automobile is here to stay. That's what our cities and suburbs are designed for after all, as anyone brave enough to bike through downtown traffic knows.
Considering the high cost of car ownership, booming urban populations, and skyrocketing gas prices, Zipcar seems like a service that fits with the zeitgeist. It's environmentally friendly and takes advantage of the Internet and a wide customer base the way Netflix did. Before singing the praises of Zipcar, though, let's take a look at some of the drawbacks of the transportation company.
On your left
Based on the pitches of CAPS community members, the biggest criticism of Zipcar seems to be potential competition. While the company was a first-mover, traditional players like Hertz
Hertz recently unveiled plans to equip its entire 375,000-vehicle U.S. fleet with technology so they can be used for car sharing by the middle of next year. The problem, however, is that the car sharing battle doesn't boil down to merely fleet size. It's a question of location, and Zipcar seems to have a solid head start. For example, Hertz on Demand offers just 22 locations in Manhattan, while Zipcar has that many in just one New York neighborhood.
Hertz and other traditional car rental companies are not in the greatest shape to expand into new markets. Hertz has a negative tangible book value and over $11 billion in debt on its books, nearly twice its market cap, while Avis carries a similar debt burden.
Finally, as a disruptor, Zipcar holds an advantage over traditional car rental companies the same way Amazon.com does over Barnes & Noble and Best Buy. While those brick-and-mortar retailers have expanded into online sales, they still aim to preserve their core retail businesses, while Amazon is able to avoid the costly labor and real estate expenses that come with brick-and-mortar locations. Similarly, Zipcar's model eliminates those costs, and it doesn't need to worry about car sharing cannibalizing its core business.
The P2P threat
Just as Zipcar disrupted the car rental market, a new kind of car sharing threatens to leapfrog its model. Peer-to-peer car sharing, or P2P, takes Zipcar's idea one step further by outfitting privately owned cars so a neighbor could rent them as they would a Zipcar. But while the P2P model could be an improvement on Zipcar's, none of the companies' offerings are close to its size, and even the biggest ones like RelayRides and GetAround are active in just a handful of markets.
Similar to Amazon, which has grown to dominate online retail in part by acquiring competitors like Zappos and diapers.com, Zipcar has flexed its muscle in the car sharing market by snatching up rivals like Avancar, Streetcar, and Flexcar. The company showed a similar interest in the P2P sector with a recent investment in Wheelz, a west coast peer-to-peer car sharing service. If P2P continues to be promising, it wouldn't be surprising to see Zipcar make a full acquisition of one of the providers.
While there are plenty of reasons to like Zipcar, including its first-mover advantage and disruptor status, the best argument for buying is in the numbers. While overall the company is only barely profitable, its expansion efforts obscure the true moneymaking potential of its model. In its established markets -- Washington, New York, San Francisco, and Boston -- Zipcar is posting substantial margins. For the fourth quarter, operating profits were 28% and 23% for the year in those cities, meaning 2011 operating profit from those four markets was about $31 million. As it expands, Zipcar will continue to invest cash in these types of dense cities, establish a dedicated user base, and aim to achieve similar profit margins across the board.
With a steady growth rate, promising market opportunities, and a partnership with Ford
Kick it up a notch
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Fool contributor Jeremy Bowman owns no shares of the companies mentioned above. The Motley Fool owns shares of Hertz Global Holdings, Best Buy, Ford Motor, Amazon.com, and Zipcar. Motley Fool newsletter services have recommended buying shares of Amazon.com, Ford Motor, Green Mountain Coffee Roasters, Zipcar, priceline.com, and Netflix. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters, writing puts on Barnes & Noble, and creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.