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Is Zipcar worth Zip?

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April 15, 2011 – Comments (3) | RELATED TICKERS: ZIP.DL2

Zipcar is a company that provides on-demand car use that just went public. While it is an interesting idea, I think it is a bad stock to buy. Why? They have had an operating loss every year that they have been in business. They have high fixed costs and are hoping that business will ramp up enough to make a profit. A business plan that includes hope makes me nervous.

Now to my mind, one hallmark of a good business is that it goes profitable from operations pretty soon after it starts. It might be overall unprofitable as money is poured into advertising and capex for rapid growth, but operations really should be profitable. If it isn't, why are you doing this? I mean, look at Chipotle the company. A new store usually goes cash flow positive in the first year. And the growth is financed out of cash flow from existing stores. Now that is a business! (Although the stock is overpriced now and I am waiting for a big pullback to rebuy it.)

Yes, there are companies that had a weird start but ended up doing very well (Amazon comes to mind) but for every Amazon there has been a whole pile of pets.com type things. (Hmm, pets.com lost money on most transactions. Why does this seem familiar?) So just having an interesting idea may not be worth much if you can't make money doing it.

Another cloud on the horizon is that the major car rental companies seem to have similar plans in the offing. Since they probably buy more carwax in a year than ZIP's entire market capitalization, they may have the size to make this work. And if they can't, then ZIP can't.

I'm tempted to call underperform on this in CAPS, but will probably wait a bit for all the irrational exuberence to burn out first. Then the long slow slide into oblivion. 

3 Comments – Post Your Own

#1) On April 15, 2011 at 5:35 PM, EnigmaDude (82.55) wrote:

I tend to agree with you.  Even if the concept takes off where are the profit margins coming from?  I suspect they will have to start advertising on their cars or something to keep the business afloat.

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#2) On April 15, 2011 at 5:42 PM, imobillc (< 20) wrote:

They are way overvalued!

 

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#3) On April 18, 2011 at 11:22 PM, checklist34 (99.71) wrote:

gun to my head, zipcar won't be the zippiest of stocks.

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