The first thing I learned from Marc Cuban about investing is that a new product must solve a problem. Even then, a good idea doesn’t necessarily make a good business, and a good business doesn’t necessarily make for a good stock.
That’s why I think Zipcar (NASDAQ:ZIP) is a great product idea but a terrible stock idea.
Zipcar is a car-sharing service. You sign up for an annual membership, reserve one of their 9,000 cars in numerous cities, pay by the hour or the day, with gas and insurance included.
On the surface, it’s a great idea. Heck, Europe’s been doing it for years. But there are so many problems with making this a sustainable business that it also means that as a stock, it’s not likely to succeed in the long run.
The first major problem is that there’s no barrier to entry. Any car company can do the same thing and, in fact, several have. Hertz (NYSE:HTZ), Avis Budget Group (NYSE:CAR), Enterprise, and U-Haul (NASDAQ:UHAL) are all entering the car-sharing field.
Which do you think has more money to gobble up market share — any of these behemoths or tiny little Zipcar, with its $80 million in cash and its negative TTM free cash flow of $18 million?
Speaking of which, this is a highly capital-intensive business. Cars need to be purchased and maintained, which is no easy task. The larger and more spread out the fleet, the more specialized the overhead (such as mechanics) a company needs.
As more competitors enter this market, we’ll start to see pricing pressure as the product becomes commoditized. Here again, Zipcar is too small to withstand a price war. That’s when the company’s capitalization will become a factor. When it comes to marketing, Zipcar again lacks the capital its competitors can wield, not to mention experience. It wasn’t able to establish a large enough footprint when it had the market to itself to dissuade entry by others.
The fact that I can list this many reasons in so few words should demonstrate the problems with Zipcar as a stock. The strength of the concept is clear since Zipcar is attracting competitors. But as Mark Cuban might say if the service showed up on ABC’s Shark Tank, “This is a money suck, and you’ll have competitors with more money all over you. I’m out.”
Lawrence Meyers does not own shares of any company mentioned.