Where Groupon Meets Zipcar – This Can't be Good
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I can't help but wonder if this is a sign of problems. In my Groupon (NASDAQ: GRPN) e-mail today I noticed a Zipcar (NASDAQ: ZIP) Online Deal. As an example of targeted advertising, the deal is only for Baltimore, MD residents. Targeted advertising can be very effective, but the part that worries me is that Zipcar felt the need to use the Groupon model to try to attract customers.
For the uninitiated, Zipcar's model is that car ownership or leases can be done a better way. Zipcar believes that its customers (Zipsters), only really need a car for a few hours or days a month. These customers don't need to buy or lease a car, have monthly car payments, insurance, registration, etc. So instead they use Zipcar's fleet of vehicles. These vehicles are usually located in busier locations where Zipsters can walk to the vehicle, or take public transportation. Customers pay an annual fee to use the service and then they can rent the vehicle by either per hour or day. Their Zipcar card unlocks the vehicle, and the cost of the rental includes insurance and gas. The service sounds great if you live in a congested area and don't really need a vehicle on a regular basis. With 180 miles included per day, the average Zipster won't come close to using their free mileage. The service sounds like it meets an underserved portion of the population. With Zipcar only in more than 5 cities in 6 states, you can see that the company has the ability to expand its presence for a long time. So what's the problem?
Zipcar is expected to grow revenues by around 20% over the next few years, and EPS is expected to grow by 50% during that same time frame. Why would a company expecting such heady growth, offer a Groupon for customers to get a $60 annual membership, a $25 sign-up fee, and $25 worth of driving credit all for $20? If you look at this deal, the company is offering an 82% discount to try and increase their membership in one area. This is fine if the company is solidly profitable, and they can afford to take a cut in margins to try and grow the business. That is not the case with Zipcar.
In the last three years, the company's revenues and costs have essentially kept pace with each other. In the last four quarters, the company has only shown a positive operating income twice. In their best quarter, the company's operating income margin was just 3.37%. I know this deal only applies to Baltimore, MD and the surrounding community. My issue with this deal is, it sounds like Zipcar is getting a little desperate to grow their membership in whatever way they can. With the $20 cost of the Groupon, there is very little to prevent someone from using Zipcar just once or twice and then canceling. Unlike if they pay the full $60 annual fee and the $25 sign-up fee, where the customer has an investment to make up, this $20 is less than the cost of a traditional car rental.
This heavy spending to try to increase the size of the customer base is having a direct effect on the company's balance sheet as well. In the last four quarters, the company has gone from over $38 million in net cash to just over $11 million in net cash. This is still a net cash position, but a 69% drop in net cash in just a year is not a promising trend. Just for a point of comparison, though Groupon has gotten a lot of negative press for not living up to expectations, the company has over $1.1 billion in cash and no long-term debt. So if Zipcar is getting desperate to move its membership forward, are there better alternatives?
To be quite honest in the car rental and sharing industry, the two major competitors both scare the heck out of me too. Hertz (NYSE: HTZ) carries over $11 billion in long-term debt versus just $2.2 billion in equity. Even if you look at the company's operating cash flow and investing activities, the company barely generated $17 million in cash flow after dividends all of last year. Avis (NASDAQ: CAR) doesn't give investors much more hope. Avis was cash flow negative last year, and that trend continued into the first quarter of 2012. The company's balance sheet is actually worse than Hertz, with about $3 billion in long-term debt versus only $435 million in equity. The numbers just don't look good no matter where you turn.
I know that loyal Zipcar investors claim that Zipcar will reinvent the car rental and sharing game. While that might be true, the numbers don't lie, this is a low margin and high debt business. If Zipcar is already resorting to a Groupon deal to grow their business, it makes you wonder how this company will ever be solidly profitable. I know that Zipcar is expected to show a positive EPS number for 2012, but there is a difference between EPS and positive cash flow. Unless Zipcar figures out how to generate positive cash flow, the company is headed for the same debt pile that its two bigger competitors already struggle with. This is a deal to zip right away from.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings and Zipcar. Motley Fool newsletter services recommend Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
