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Zipcar Continues To Confound Investors
Zipcar (Nasdaq:ZIP), the world's leading car sharing network, announced third quarter results November 8 after the market closed. Both revenues and earnings were solid and exceeding analyst expectations. Its stock jumped almost 16% with volume 15 times its three-month daily average. Despite the good news, its stock closed last week's trading at $7 a share, down 48% year to date. Profitable or not, investors just can't seem to get comfortable with its business model. Those of you who take the time to understand how it intends to build its business will profit, while others who don't will sit on the sidelines missing out on the ultimate contrarian bet.
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What's the Mystery?
Before I get into the financial ramifications of its business model, let me momentarily dwell on where the world is headed in the next 20 years. I live in Canada and in 2011, 35% of the population lived in three cities: Toronto, Vancouver and Montreal. That number could be as high as 50% by 2032. Most of us won't need a car, won't be able to afford the cost to buy and maintain one or will simply choose to avoid the cost altogether. That doesn't mean we won't ever need the use of a vehicle, but on those rare occasions when we do, Zipcar is a heck of a lot more convenient than Hertz (NYSE:HTZ) or Avis (Nasdaq:CAR) will ever be. Anyone who's rented a car from either company will know how annoying it is being asked every single time whether we want insurance coverage, despite the fact our existing coverage does the trick. My point: Zipcar is simple and convenient. Yes, competitors including the rental car agencies can figure out how to make a better mousetrap. That doesn't mean they will. Just look at all the examples of industries where people assume a better business model will come along to dislodge the Coca-Cola's (NYSE:KO) of the world. I'm still waiting.
SEE: The True Cost Of Owning A Car
Amazon Revisited
How many years did it take Amazon (Nasdaq:AMZN) to make money? The king of online retail took exactly nine years to get to bottom-line profitability generating $35 million in net profit from $5.3 billion in revenue. CEO Jeff Bezos is now one of the wealthiest men in the world. Amazon got to where it is today by making big bets on technology and customer service. There were plenty of wannabe's along the way but it stuck to its guns and here we are. Zipcar got its start in 2000 and given its Q3 results, it looks as though it will deliver its first annual net profit in 2012, 12 years after its start and three years slower than Amazon. Some bears believe - like many - that competition from rental car companies, not to mention Daimler's car2go service, will force Zipcar to eliminate its annual membership fee. It's a good theory but I don't believe it holds water.
SEE: A Primer On Investing In The Tech Industry
Technology Platform
Zipcar recently invested in the $13.7 million Series A financing round for Wheelz, a university-focused peer-to-peer car sharing service that allows students to rent out their cars by the hour, earning cash while in class. Students have a DriveBox installed in their car which allows renters, just like with Zipcar, to use a DriveCard to access a vehicle and hit the road without having to get the keys, etc. The two biggest competitors for Wheelz, according to TechCrunch, have clunkier systems that make it a more time consuming process. With Zipcar already possessing a proprietary technology platform, the alignment with Wheelz allows it to move people loath to pay any kind of membership fee into a less expensive option. In addition, now that it's experimenting with a $6 per month, six-month commitment to attract those sitting on the fence about annual membership fees, I see it covering all the bases when it comes to customer objections. Besides, if your time is valuable and you're a young urban professional, is $65 really going to be a nuisance for most of those people? Not a chance. Peer-to-peer car sharing actually helps rather than hinders its business model going forward.
The Bottom Line
Zipcar added about 36,000 new members in the third quarter on a sequential basis. It spent $70 to get each account, down from $89 in Q2. In the third quarter its total revenue per member per month was $34. That's $408 per year. Using Boston as an example, the annual fee is $60. Therefore, subtracting the $70 cost per new account from the annual fee, Zipcar will generate approximately $398 over the next 12 months from each of those 36,000 new members, a grand total of $14.33 million in additional revenue.
With 20 major markets under its roof and Europe moving along nicely, I think Zipcar's business model makes a heck of lot more sense than Netflix (Nasdaq:NFLX). In my opinion, Carl Icahn bought the wrong stock.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.
What's the Mystery?
Before I get into the financial ramifications of its business model, let me momentarily dwell on where the world is headed in the next 20 years. I live in Canada and in 2011, 35% of the population lived in three cities: Toronto, Vancouver and Montreal. That number could be as high as 50% by 2032. Most of us won't need a car, won't be able to afford the cost to buy and maintain one or will simply choose to avoid the cost altogether. That doesn't mean we won't ever need the use of a vehicle, but on those rare occasions when we do, Zipcar is a heck of a lot more convenient than Hertz (NYSE:HTZ) or Avis (Nasdaq:CAR) will ever be. Anyone who's rented a car from either company will know how annoying it is being asked every single time whether we want insurance coverage, despite the fact our existing coverage does the trick. My point: Zipcar is simple and convenient. Yes, competitors including the rental car agencies can figure out how to make a better mousetrap. That doesn't mean they will. Just look at all the examples of industries where people assume a better business model will come along to dislodge the Coca-Cola's (NYSE:KO) of the world. I'm still waiting.
SEE: The True Cost Of Owning A Car
Amazon Revisited
How many years did it take Amazon (Nasdaq:AMZN) to make money? The king of online retail took exactly nine years to get to bottom-line profitability generating $35 million in net profit from $5.3 billion in revenue. CEO Jeff Bezos is now one of the wealthiest men in the world. Amazon got to where it is today by making big bets on technology and customer service. There were plenty of wannabe's along the way but it stuck to its guns and here we are. Zipcar got its start in 2000 and given its Q3 results, it looks as though it will deliver its first annual net profit in 2012, 12 years after its start and three years slower than Amazon. Some bears believe - like many - that competition from rental car companies, not to mention Daimler's car2go service, will force Zipcar to eliminate its annual membership fee. It's a good theory but I don't believe it holds water.
Technology Platform
Zipcar recently invested in the $13.7 million Series A financing round for Wheelz, a university-focused peer-to-peer car sharing service that allows students to rent out their cars by the hour, earning cash while in class. Students have a DriveBox installed in their car which allows renters, just like with Zipcar, to use a DriveCard to access a vehicle and hit the road without having to get the keys, etc. The two biggest competitors for Wheelz, according to TechCrunch, have clunkier systems that make it a more time consuming process. With Zipcar already possessing a proprietary technology platform, the alignment with Wheelz allows it to move people loath to pay any kind of membership fee into a less expensive option. In addition, now that it's experimenting with a $6 per month, six-month commitment to attract those sitting on the fence about annual membership fees, I see it covering all the bases when it comes to customer objections. Besides, if your time is valuable and you're a young urban professional, is $65 really going to be a nuisance for most of those people? Not a chance. Peer-to-peer car sharing actually helps rather than hinders its business model going forward.
The Bottom Line
Zipcar added about 36,000 new members in the third quarter on a sequential basis. It spent $70 to get each account, down from $89 in Q2. In the third quarter its total revenue per member per month was $34. That's $408 per year. Using Boston as an example, the annual fee is $60. Therefore, subtracting the $70 cost per new account from the annual fee, Zipcar will generate approximately $398 over the next 12 months from each of those 36,000 new members, a grand total of $14.33 million in additional revenue.
With 20 major markets under its roof and Europe moving along nicely, I think Zipcar's business model makes a heck of lot more sense than Netflix (Nasdaq:NFLX). In my opinion, Carl Icahn bought the wrong stock.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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