Zipcar's Bottom Line is Zip

By Michael Carter - August 28, 2012 | Tickers: HTZ, PAY, ZIP | 0 Comments

• Email
• Print

A few weeks ago Zipcar, Inc. (NASDAQ: ZIP) revealed yet another losing quarter after posting second-quarter results and giving lower future guidance.  I actually had to study the Zipcar business model when I was completing my MBA a few years ago.  The biggest difference between then (2009) and now is that Zipcar is finally trading publicly as of April 14, 2011 and their problems are wide out in the open.  Since its IPO, Zipcar’s stock value has steadily declined over 70%.  I knew this would happen and so did the rest of the class after we studied the business for a semester to decide if the company should go public at all.

The Idea

Zipcar may seem like a revolutionary idea to provide membership for on-demand automobile rental.  However, the idea actually originated in Switzerland in 1987.  Zipcar’s business model revolves around the idea that this business could thrive in urban locations where there is a dense base of potential users, where parking is expensive, and where the need to drive is limited.  The idea seemed to make sense in densely populated college towns where students didn’t need to drive much more than 5000-6000 miles a year and the sharing aspect of the cars would bring in the big bucks.

Problems – Planning

The first big problem about Zipcar hasn’t changed the past decade and it originates on the planning of the business itself.  Sizing the market was not performed correctly in 1999-2001 when the company was still in the initial stages of becoming an actual company and poor research followed on how to design the business.  Co-founder Robin Chase believed that Zipcar was a niche product because it would fill the void not covered by taxis (short trips) and rental cars (medium to longer trips).  Zipcar’s market was to be for short-term, on-demand private car access. 

Problems – Pricing

Between 1999 and 2000, the business model kept changing.  It went from having high initiation fees and low hourly rates to having low initiation fees and extremely high hourly rates.  Today Zipcar charges a one-time application fee, an annual fee, and reservation charges.  They have also been sued in 2009 and again in 2011 for not being clear to customers of hidden fees and other charges that make the entire idea of using Zipcar sound worse to potential customers.

Problems – Competition

The most underestimated problem for Zipcar since its inception over a decade ago is the competition.  In Zipcar’s latest quarterly report, they discuss a section about protecting their intellectual property and their vehicle platform system.  Besides the obvious competition from taxis, rental cars, buses, and plain walking, other bigger companies have introduced their own version of the Zipcar business model. 

If we look at Washington D.C. closer, we realize why Zipcar just doesn’t work when you can compare it to riding on the metro, buses, taxis, or even rental cars. 

Note: Zipcar data for Washington DC area under Occasional Driving Plan.

Now every city is different and not every city has a Metrorail system like Washington DC.  But every major city has a major bus route of some type, taxis, or some other subway system.  Some have all three.

Alternatives

Companies like VeriFone Systems (NYSE: PAY) have made riding in taxis more attractive to those not wishing to worry about carrying cash.  In July, VeriFone won a five year contract to develop electronic credit card processing systems in Washington D.C. taxis.  VeriFone is a global leader in secure electronic payment technologies and has grown substantially in recent years for the betterment of its net income bottom line.  The past 3 years, PAY has seen its income increase from the red of -$157 million (2009) to $282 million (2011).

What makes PAY a stock to consider when comparing to ZIP may not be so straight forward but the similarities are there.  Both companies seek to improve everyday systems and processes that can already be completed successfully with the existing infrastructure and technologies from existing companies.  PAY improves the payment systems and makes paying for products easier with product lines that range across multiple industries like financial, retail, hospitality, petroleum, government, and healthcare markets.  ZIP attempts to improve transportation by supplying a service that makes traveling easier.  PAY has executed its business model far better, however, by partnering with top companies like PayPal and continuing to make deals with businesses and stores to use their payment systems.  ZIP from the beginning has attempted to go solo in the transportation business and in doing so has found it hard to compete with the big names in the rental car and truck industry as well as other startups trying to duplicate the ZIP business model and making it better.

If you want a company that is more directly involved in the transportation business than PAY, I would consider Hertz (NYSE: HTZ).  They have a lot going for them as a company today.  They have been around nearly a century since being founded in 1918 and they currently have a global scope of 145 countries.  They also have the capital and ability to expand their business and slowly eat away at Zipcar after creating their global car sharing service in December 2008 known as “Hertz on Demand.”  It currently operates in Berlin, London, Madrid, New York City, and Paris as well as numerous universities around the world.  It sounds a lot like Zipcar doesn’t it?  Sometimes it is better to be a late entrant to the game if you can see where pioneers have failed.  Invest in a company that does what Zipcar does plus a lot more and one that has been doing a lot more for a lot longer.  If you are wondering about financials, they have seen a decent rise from negative territory to positive the last 3 years according to their net income bottom line.  The past 3 years, HTZ has seen its income increase from the red also: -$130 million (2009) to $176 million (2011).

Bottom Line for Zipcar

Note: Zipcar financial data taken from public records.

Cash flow from investing activities change as a result from amounts spent on investments in capital assets such as plant and equipment among other things like investments in the financial markets.  What attributed to the huge loss increases has been due to a doubling of employees (221 in 2010 to 474 as of April 2011), property and equipment cost increases due to net vehicle purchases, and attempts to expand too quickly given the poor results in current cities.

Investors should also consider the increasing long-term debt that is currently at $86,000,000 as of June 30, 2012 and due to be paid by 2015.  The company also leases office space and its vehicles.  In recent years, Zipcar has merged with Flexcar in 2007, partnered with Avancar in 2009, and acquired Streetcar in 2010.

Overall, what has hurt Zipcar from the beginning continues to hurt it today.  There is way too much overhead and expenses to be paid out before any profit generating takes place.  The fleet itself is unnecessarily costly and cumbersome with over 30 makes and models of vehicles from BMWs to Prius Hybrids.  This makes little sense when it comes to maintenance and reusing old parts.  If a Zipcar customer decides to crash a BMW, those scrapped parts that can be reused, can only be used on other BMW’s in the fleet of the same model.  There is no uniformity with Zipcar and there never has been.  Today the company is public – something our MBA class thought it was not ready for back in 2009.  In my opinion, it still wasn’t ready in 2011.  The only thing uniform about Zipcar is their Earnings per Share (EPS).  In the past 10 quarters, they have turned a profit just twice ($0.02 and $0.86 for September and December of 2011, respectively.)

• Email
• Print
• Feedback