Founded in 2000, Zipcar (NYSE:ZIP) is now the world’s largest car-sharing service, with more than 560,000 members (called Zipsters). Here’s how the service works: A Zipster will use the Web, iPhone or traditional phone to locate a car and use a Zipcard to unlock it. He or she will then be charged only for the time it is used. It’s an innovative model and would not be possible but for the cutting-edge technologies that have emerged over the past decade.
As a testament to its success, the company has just pulled off an IPO, Zipcar issuing 9.7 million shares late Wednesday at $18 each, which was above the $14-$16 expected range. And so far in Thursday’s trading, the stock price is up a sizzling 61%.
But perhaps the action is too frothy, or is there still value for investors? Here’s a look at the pros and cons:
Value proposition. In large cities, owning a car can be expensive and wasteful (surveys show that a typical car will remain idle 90% of the time). But with Zipcar, a customer can save up to 70% of the total transportation costs. After all, there is no need for lease payments, insurance, registration, taxes and parking fees.
Besides, the cars are located in reserved parking lots, which are usually within 10 minute walks.
Infrastructure. Zipcar has the tech DNA of a Google (Nasdaq:GOOG) or a Facebook. For example, the company has spent about 10 years developing proprietary technology, which allows for transactions, map tracking, member management, keyless vehicle access and reservations. As a result, the platform captures a huge amount of valuable information. This means that Zipcar can learn from patterns and customer behavior, which should lower costs as well as improve loyalty and productivity.
A lifestyle brand. Zipsters are enthusiastic about the car-sharing concept. Besides being convenient and cost-effective, it is also sustainable. For example, there tends to be lower carbon dioxide emissions. In fact, according to a study from Frost & Sullivan, each shared car replaces about 15 cars on the road.
Zipsters are also brand ambassadors. About 28% of new members come from referrals.
Competition. Seeing the growth opportunities, traditional rental car companies – like Hertz (NYSE:HTZ), Enterprise and UHaul (Nasdaq:UHAL) – have launched their own car sharing services. True, they are still small. But these rivals have the resources to build strong platforms.
At the same time, there are a variety of nonprofit operators, such as iGo and City Car Share. While they may not have the fancy technologies of Zipcar, they do engender strong loyalty and have low prices.
Global risks. Zipcar believes that its approach is universal. To this end, the company has been investing in foreign markets. For example, there was a recent acquisition of Streetcar, which operates a car-sharing service in the U.K.
However, such moves are risky. It can be tough to integrate different cultures — especially since Zipcar has a very strong set of core principles and values.
Fleet costs. On average, Zipcar holds a vehicle from two to three years. After this, it is disposed via auction or direct sales to dealers. In other words, there are substantial inventory costs. This could pose problems if there is a dropoff in business.
Zipcar is growing the top line at a rapid rate. Over the past year, revenue increased by 42% to $186.1 million. However, the company is still losing money, posting a loss of $14.1 million in 2010.
With a market cap of $1.1billion, the stock does look pricey. But for aggressive growth investors, this is usually not much of a consideration, as the momentum is likely to continue for some time. Thus, for these kinds of investors – who can stomach volatility – the pros outweigh the cons.