Zipcar: One of the Cheapest Stocks Available with a 2-3x Return

By: SumZero Staff | Published: September 10, 2012 | Read Comments (7)

I submit this write-up knowing full well that the SumZero community quickly frowns upon unprofitable young businesses with seemingly expensive valuations. I am doing so because I believe that Zipcar (ZIP) is one of the cheapest stocks available and offers a 2x-3x return opportunity.

Over the last 12 months, Hertz, Avis Budget, and Dollar Thrifty had average fleet sizes of 630k, 430k, and 108k, and generated annual gross margin per vehicle of approximately $3,000, $3,700, and $3,500 respectively. Zipcar, by comparison, generated $7,400 in gross margin per vehicle with a fleet size of only 10k. Note that ZIP acquires cars at the about same price point, if not a little less, than the traditional rental car companies.

In spite of generating roughly double the gross margin dollars per vehicle and having a far superior growth profile, Zipcar trades at a TEV to gross margin multiple of only 3.7x, compared to an average of 8.6x for its traditional rental counterparts. I expect Zipcar's valuation over time to at least catch up to, if not surpass, its traditional rental competitors as the company continues to penetrate key cities in North America and Western Europe.

I use a gross margin multiple because ZIP has only recently broke even and is likely to experience significant operating margin expansion as its fleet expands from 10k to 20k and its membership base expands from 730k to 1mm+. EBITDA and earnings multiples are not useful for evaluating ZIP's valuation because the company has only recently achieved positive operating profitability.

How did Zipcar become cheap? The below two developments resulted in a significant deceleration in top line growth and a significant revaluation of ZIP's equity.

(1) ZIP's expansion into the UK has gotten off to a very rocky start. ZIP acquired StreetCar in April 2010. In the second half of 2011, they finally received the necessary approvals and were able to start rebranding the service and upgrading systems. The rebranded service grew only 6% in 1Q12 compared to the 20%+ secular growth that ZIP has enjoyed historically. Growth in the UK remains weak, but is showing very slight signs of improvement. Over a longer horizon, I expect growth in the UK to accelerate to ZIP's historical levels.

(2) Subscriber growth slowed significantly in 2Q12 following a failed marketing experiment with online radio advertising. ZIP has since fired its CMO and returned to tried and true marketing tactics. Management indicates that its most mature markets continue to grow at a rate similar to its younger markets, offering evidence that the company is not yet approaching its addressable market opportunity.

With a TEV of $251 million and 2012 revenue of ~$275 million which will generate ~$80 million of gross margin, I find ZIP to be trading at a very attractive valuation now that it has reached profitability. Competitors are years behind in building the network of cars and online/mobile rental system that ZIP has constructed. And, with only 730k renters, ZIP still has a significant penetration opportunity ahead of it.

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Comments

Raj Patel September 17, 2012 edit |

How can you expect margin expansion? There is intense competition within the industry with the "traditional" rental car companies offering daily deals, with cars available in university parking lots, etc. The traditional car companies have way more capital and will likely leverage it to put pressure on Zipcar. Also, using Gross Margin in comparing Hertz, Budget, etc. is foolish because they do not cover the cost of fuel whereas Zipcar does. Zipcar is in a capital intensive industry with downward margin pressure from intense competition, and therefore is fairly valued.

Burr Patterson, Jr. September 17, 2012 edit |

Don't Add to a Loser

Alex Luu September 17, 2012 edit |

I have never heard of Zipcar, however after a few minutes of reading upon how it works I can relate the company to a service called Wecar. Currently at school in Southern California a service called Wecar is offered to students with a much less annual fee of $35. The rates are also much cheaper at $7 per hour and $56 for the entire day. It also includes gas and a "WeCard." I am unsure about insurance, but I believe you are responsible for the first $1000 of damage. Another downside is that you are only limited to the Ford Fusion.

Personal opinions: Although the company generates an increasing gross profit every quarter, it has a substantial amount of negative net incomes reported every quarter with an inconsistent range of negative numbers. The last Q. results had the highest gross profit and still the income was in the negative range. I mentioned WeCar above because I want to show that Zipcar has competitors that provides services in the very same way with very competitive pricing for consumers.

Garrett Prehatney September 18, 2012 edit |

Zipcar has flexibility with the models of cars available and at the school I attended they were the only rental option. That being said I never used them because I owned my own car.

Jonathan Garza September 21, 2012 edit |

I also see it hard for Zipcar to compete against people like Enterprise or Hertz.

Enterprise does not only provide quality service and higher quality employees, they also sell cars which are kept and maintained as well as a Toyota Used Dealership.

Does Zipcar have a "Dealership Like" avenue like Enterprise or Hertz?

Rennan Pastana September 22, 2012 edit |

The downside with Zipcar is that it has saturated its growth spots, i.e. metropolitan areas such as NYC, Chicago, etc. The zipcar industry has VERY LITTLE room to expand, and if/when it does choose to expand, it will come at a high marginal cost and hence diminishing returns

frederick sanabrai September 26, 2012 edit |

I do not believe Zip has saturated its niche market. Is like implying that a Harvard MBA was not taught to grow a company strategically. Zip has plenty of room to grow, if a good solid strategic plan is implemented by its management; which I'm pretty sure it has. I can easily list dozens of markets Zip can go into without remotely competing with the big airport store names. And I can list at least half dozen ideas for restructuring their business model until they find one that will help them explode.

Have some faith folks.

Raj Patel September 17, 2012 edit |

How can you expect margin expansion? There is intense competition within the industry with the "traditional" rental car companies offering daily deals, with cars available in university parking lots, etc. The traditional car companies have way more capital and will likely leverage it to put pressure on Zipcar. Also, using Gross Margin in comparing Hertz, Budget, etc. is foolish because they do not cover the cost of fuel whereas Zipcar does. Zipcar is in a capital intensive industry with downward margin pressure from intense competition, and therefore is fairly valued.
Burr Patterson, Jr. September 17, 2012 edit |

Don't Add to a Loser
Alex Luu September 17, 2012 edit |

I have never heard of Zipcar, however after a few minutes of reading upon how it works I can relate the company to a service called Wecar. Currently at school in Southern California a service called Wecar is offered to students with a much less annual fee of $35. The rates are also much cheaper at $7 per hour and $56 for the entire day. It also includes gas and a "WeCard." I am unsure about insurance, but I believe you are responsible for the first $1000 of damage. Another downside is that you are only limited to the Ford Fusion.

Personal opinions: Although the company generates an increasing gross profit every quarter, it has a substantial amount of negative net incomes reported every quarter with an inconsistent range of negative numbers. The last Q. results had the highest gross profit and still the income was in the negative range. I mentioned WeCar above because I want to show that Zipcar has competitors that provides services in the very same way with very competitive pricing for consumers.
Garrett Prehatney September 18, 2012 edit |

Zipcar has flexibility with the models of cars available and at the school I attended they were the only rental option. That being said I never used them because I owned my own car.
Jonathan Garza September 21, 2012 edit |

I also see it hard for Zipcar to compete against people like Enterprise or Hertz.

Enterprise does not only provide quality service and higher quality employees, they also sell cars which are kept and maintained as well as a Toyota Used Dealership.

Does Zipcar have a "Dealership Like" avenue like Enterprise or Hertz?
Rennan Pastana September 22, 2012 edit |

The downside with Zipcar is that it has saturated its growth spots, i.e. metropolitan areas such as NYC, Chicago, etc. The zipcar industry has VERY LITTLE room to expand, and if/when it does choose to expand, it will come at a high marginal cost and hence diminishing returns
frederick sanabrai September 26, 2012 edit |

I do not believe Zip has saturated its niche market. Is like implying that a Harvard MBA was not taught to grow a company strategically. Zip has plenty of room to grow, if a good solid strategic plan is implemented by its management; which I'm pretty sure it has. I can easily list dozens of markets Zip can go into without remotely competing with the big airport store names. And I can list at least half dozen ideas for restructuring their business model until they find one that will help them explode.

Have some faith folks.

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