ZipCar IPO Clobbers Expections
Hourly rental firm captures investor fancy, but is it unique enough to keep big rental agencies and car dealers at bay?
ZipCar opened Thursday morning and $30 per share and is being traded under the symbol "ZIP."
Founded in 2000 in Cambridge, MA, ZipCar is a car-sharing service that currently exists in over 200 markets. The service requires customers to sign up for an annual membership. Upon enrolling, members can reserve one of 8,000 ZipCar vehicles nationwide and pay for its use by the hour. Gas and insurance are included in the rate.
The service has proved popular, especially in metropolitan areas, boasting about 560,000 members. But, in spite of an impressive number of enrolled participants, the company has yet to post a profitable quarter. Since its inception, ZipCar has lost $64.5 million and still does not expect to be profitable this year, mostly due to its capital-heavy nature and aggressive push to expand in order to compete with rivals.
ZipCar said in a press release that it plans to use the proceeds from the IPO for the "repayment of certain debt, business expansion, working capital and other general corporate purposes, including the development of new services, sales and marketing activities and capital expenditures."
ZipCar has been growing revenue and is continuing to expand. In 2010, the company reported $186.1 million in sales -- $52.1 million in the fourth quarter -- and purchased UK-based car-sharing service Streetcar Limited. ZipCar has also said that it is looking to move into Asian markets, where its sees potential for $4 billion in revenue by the start of next decade.
How the road may turn
The fact that the leading and best known brand in the field of hourly vehicle rental hasn't turned a profit yet is worrisome to some investors and industry analysts. Weaknesses in Zipcar's business model are pretty obvious, and can only be overcome through superior management execution.
The biggest issue confronting Zipcar: If demand is really there for hourly rental services going forward, larger, better-known and better capitalized rental agencies such as Hertz, Budget and Enterprise can easily cut into Zipcar's model with existing facilities and retail points, plus better pricing agreements with automakers. Hertz is already piloting hourly rental.
If the big rental agencies stay out of the field, investors will wonder if hourly rental through a membership format is viable over the long term.
The other threat to the business is car dealerships with used cars. Again, if the business model is there to make money, who better to capitalize than friendly neighborhood Ford or Chevy dealers with an assist from those big national companies?
The viability of the idea is viewed as generational. Surveys and research studies are showing that younger people living in and near cities with decent mass transit show decreasing interest in owning a car and paying for insurance, repairs, parking, etc. This change in attitude among young consumers of driving age is also seen in Japan and Europe.
Some of this attitude, though, can be attributed to the mounting unemployment and under-employment of 18-30 year-olds in the current economic climate. Even those college and high school grads who are getting jobs are seeing starting salaries lower than their older siblings saw a decade ago.
All of these factors are contributing to a "new frugality" among young people of working and driving age that is impacting how they view their housing and transportation needs.
This, in turn, is fueling interest in ZipCar. But if they are real and long-term changes to the marketplace, the company is going to have plenty of fierce competition.
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