The "sharing economy" has a new star, and it's called Uber Technologies. For those who are unfamiliar with the term, the sharing economy is based on people using the Internet to sell services or other resources. Uber is based on a smartphone app used to hail cars driven by both professional and nonprofessional drivers and its business model is making traditional taxi and limo services uneasy.
Uber's services are available in more than 130 cities and the company has earned a profit in several of its top markets. While its revenue is currently in the hundreds of millions, the company's founder and Chief Executive Officer Travis Kalanick told The Wall Street Journal that its revenue is approximately doubling every six months and, this year, Uber has seen more growth than it had the previous year.
According to the Journal, the company has raised $1.2 billion from a variety of investors that include financial services firm Fidelity Investments. This has led the five-year-old company to acquire a valuation of $18.2 billion. That valuation rivals those of competitors like Hertz (HTZG.Q) and Avis (CAR 0.66%). Those that forked over their cash have faith that the company has the potential to grow globally and expand its business into other areas, like logistics. However, there are some challenges -- in some cities, local governments want the services to follow the same rules dictated to taxi and limo services; Uber is also missing from some major cities, like Vancouver and Las Vegas.
Despite the novelty of the service it provides, Uber has to deal with stiff competition from the second largest car-sharing player in the market, Lyft. In fact, Uber has cut its prices and lowered its profit margin to lure customers away from its competitor. The company is considered to be at the forefront of a marketplace where service pricing rapidly changes depending on supply and demand for the service .
Will traditional leasing companies lose business?
According to Auto Rental News, Hertz ranks second in the car-rental world in terms of cars in service, with approximately 488,000 vehicles. Its 2013 revenue was around $6.3 billion . Total revenue has risen about 50% from 2009 to 2013 and the bottom line has steadily improved from a 2009 loss of ($114) million to net income of $394 million in 2013. The company has also been expanding. In 2011 it acquired Donlen Corp., a fleet leasing and management services provider, and in 2012 it acquired Dollar Thrifty's car-rental business .
However, revenue figures going from 2011 forward cannot be fully relied upon. Hertz recently announced that it will restate its 2011 financial statements and make corrections, along with a possible restatement, on its 2012 and 2013 financials. The company made this decision because of serious accounting problems that were identified during an internal audit. In a filing with the Securities and Exchange Commission, Hertz added that its financial results for 2011 should not be relied upon due to reporting errors. In March, the company identified $46.3 million in accounting errors dating back to 2011.
Hertz was set to report first-quarter results on June 9 but has delayed its report until it files the amendment for the annual report. The identified errors relate to the capitalization and depreciation of certain assets and amounts allocated to its allowance for doubtful accounts in Brazil. The company did mention that it expected first-quarter 2014 results to come in below market estimates. Analysts polled by Thomson Reuters predict EPS will come in at about $0.09 with quarterly revenue of about $2.57 billion. Despite the accounting issues and a drop in share price of 9% after the announcement, downgrades on the stock have yet to be issued .
United Rentals (URI -0.93%) competes with Hertz's fleet leasing business. The company is the world's largest equipment rental company and recently earned a spot on the Fortune 500 list. In the first quarter of 2014, the company's rental revenue rose 9.7% year-over-year. Reported adjusted EBITDA was $519 million and adjusted EBITDA margin was 44.1%, up $68 million and 310 basis points. The company maintained its full-year 2014 guidance of adjusted EBITDA in the range of $2.55 billion-$2.65 billion and believes results will come in at the top of the range.
To grow its business United Rentals has been engaging in strategic acquisitions. In March 2014, the company announced that it will purchase National Pump, a specialty pump rental company, for $780 million . United Rentals has beat analyst estimates in the past four quarters and its shares trade at a reasonable price, as it sports a 2015 forward P/E ratio of 13 and a PEG ratio of 0.5, well below the average for the S&P 500.
Hertz' close rival Avis saw total revenue rise 10% to $1.9 billion in the first quarter of 2014. The company had strong volumes during the quarter despite higher prices in its North American commercial and leisure lines. Its adjusted EBITDA for the quarter increased 26% to $117 million. Interestingly, the company also owns ZipCar, which provides a service similar to that of Uber. Avis acquired ZipCar in 2013 and the acquisition has contributed $68 million to revenue and $5 million to adjusted EBITDA. The company expects full year 2014 revenue of $8.4 billion-$8.6 billion, an increase of 6%-8% versus 2013. Avis' shares trade at a reasonable 17 times 2015 earnings with a PEG ratio of 0.83 .
My Foolish conclusion
There has been no hint that Uber Technologies will file an IPO in the immediate future. However, the company is worth watching by investors who are interested in how this evolving car sharing service will impact other players involved in vehicle leasing. If the popularity of the service continues to grow and attract investment capital, traditional car-rental companies may lose business to this novel service. If Uber's success continues, the company could also become an interesting acquisition for one of its rivals, similar to the way ZipCar was acquired by Avis.
