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Zipcar is Driving on Borrowed Time

Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Car sharing pioneer Zipcar (UNKNOWN: ZIP.DL2) is running late. By the company's own estimates, it should have had a higher member count and more profit at this point. But that hasn't happened. The company’s members know that they face stiff penalties when they're late returning a car. In the same way, Zipcar should know that time is working against the company. Debts are piling up and Wall Street is quickly losing faith in the business. 

A Strong Start

Until recently that faith seemed well placed. After all, Zipcar has a lot going for it. It is a clear leader in the car sharing space, with over 700,000 paying members, an established brand, and a growing international presence. Boasting impressive tech systems and strong appeal in cities and campuses, Zipcar looked well positioned to capitalize on urbanization and changing youth spending trends.

Those are the same trends that worry mass market car producers like Ford (NYSE: F) and General Motors (NYSE: GM). Both auto makers reported lower sales in the latest quarter and have been losing ground in the 18-34 year-old demographic. That's led many to question whether car ownership is still an American rite of passage. The hope for Zipcar has been that Ford's and GM's loss will be Zipcar's gain. 

But I think comedian Stephen Colbert had it right when he said “America’s young people are buying fewer cars. In related news, America’s young people are buying fewer everything else.” Consumers aren’t abandoning the idea of car ownership. They're just reacting to a tough economy.

Wrong Turns

Even if on-demand driving isn't replacing car ownership, Zipcar should still be benefiting from its hard-won market expertise by now. It has over five years of car sharing experience in its oldest markets -- Boston, San Francisco, and New York -- more than any competitor. And the company remains the only national brand that people associate with hourly car rental services. But those advantages haven't translated into stellar operating results.

For example, the company touted in financial filings that its "extensive" experience has made management "experts" at membership acquisition. That’s a heck of an advantage to claim you hold over your competitors. But the claim suffers from the drawback of being flat wrong. Member acquisition costs jumped last quarter, from $70 to $89 per new account, after the company's latest advertising push fell flat. That raises the question: If the company is such an expert at this market, then why is it being forced back to the drawing board on basic marketing strategies?

One group that isn’t waiting for the answer is Zipcar’s competition. Hertz (NYSE: HTZ), for example, through a new service called Hertz on-demand, is entering the market in a big way. And what Hertz lacks in technical capabilities and experience with hourly rentals the company makes up for in size. With a fleet that’s 30 times the Zipcar motor pool, Hertz threatens to attack ZIP’s member base using scale advantages, or at least to bid up the company’s costs. Other services like peer-to-peer car sharing and one-way, intra-city driving are also aiming for a piece of the on-demand travel pie.

But more worrying than competition poaching members is Zipcar’s spiking debt. Maintaining a global fleet of vehicles is a capital-intensive job. And Zipcar went public last year in part so that it could pay off all the debt it had accumulated up to that point. Now, just a year later, the company has met that previous debt level, and has blown right past it. With shares down 40% this year a new stock offering wouldn't make the same financial sense.

Bottom Line

Still, a leadership position and loyal fan base can buy a company a lot of room to deal with the inevitable bumps that come with aggressive growth plans like the one ZIP is following. So the company has some time to make adjustments and try to right the course, particularly in its marketing strategy. But with debt piling up and the competition piling on, Zipcar had better hurry. Its reservation window is closing.

Dig Deeper

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

SigmaSwan has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford, Hertz Global Holdings, and Zipcar. Motley Fool newsletter services recommend Ford, General Motors Company, and 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.

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