Three Reasons Why Zipcar’s Worth $11

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ZIP: Zipcar logo
ZIP
Zipcar

Car-sharing company Zipcar’s (NASDAQ:ZIP) stock has seen a steady decline this year, falling by over 40% since January. The reasons for this decline are twofold. First, a large portion of this decline is attributable to the company’s recent downgrade to its earnings estimates. Second, the recent entry of car rental giants such as Hertz into the car sharing space along with major European car-sharing player Car2go has dented investor confidence in Zipcar.

We believe that the steep decline is an overreaction and that the company is undervalued at its current price. Here are three reasons why we believe that Zipcar is worth at least 30% more than its stock price suggests.

See our full analysis for Zipcar

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Zipcar Can Leverage Competitive Advantages to Establish Market Foothold

Despite the threat of recent entrants and relatively low barriers to entry in the car-sharing space, Zipcar possesses several strengths which it can use to its advantage.

As a pioneer in the car-sharing domain, Zipcar has established a wide ranging network, with penetration into 19 major metropolitan areas in the U.S., Canada and Europe. Unlike car rental services such as Hertz whose cars are primarily located near airports, Zipcar’s vehicles are interspersed in different areas of cities, which allows more convenient access to members.

Zipcar recently initiated the “Zipvan” cargo van sharing service, and is in the process of expanding the service across North America. This will allow it to gain a foothold in what is a relatively nascent market. Furthermore, the business presents the company with an opportunity to diversify its customer base and attain a superior revenue mix, considering its higher pricing is relative to the car sharing service.

Another competitive advantage is the strong brand name, which Zipcar has developed through unique advertising campaigns. In a recent survey conducted by The Centre for Brand Analysis, Zipcar was named among the “coolest” brands in the UK.  ((Zipcar name one of the UK’s coolest brands, The Green Car Website, September 2012)) We believe this branding advantage will allow the company to construct a moat for itself in a domain which is under threat of being overrun by conventional car rental service providers.

Car Sharing Business Has Immense Growth Potential

The primary advantages of the revolutionary system to car-sharing customers include a drastic reduction in costs compared to car ownership, and greater convenience relative to conventional car rental services. In the long run, the system offers several social benefits such as reduced emissions and less traffic.

The global market for car sharing is growing at a rapid pace. Zipcar currently has around 730,000 members. This represents an impressive annual growth rate of over 36% since 2008. We expect a similar rate of growth in the long term with the membership base in North America reaching around 1.3 million by the end of our forecast period, although this may be impacted by increasing competition.

Another reason why we believe that car-sharing will thrive going forward is the growing market for electric-vehicles. People may be open to the prospect of purchasing an electric car, but currently have several reservations about the same, in areas such as battery safety and capacity, charge time and range. Car-sharing provides the perfect opportunity for potential buyers to test out electric vehicles before purchasing them. Zipcar has identified this as a growth opportunity and is aggressively expanding its fleet of electric vehicles. [1]

Expansion Allows For Margin Growth

As mentioned earlier, Zipcar has a large and growing membership base, a well established network across North America, and a growing fleet of over 11,000 vehicles. These will enable the company to achieve operational efficiencies and economies of scale, which would in turn give it significant cost advantages over newer entrants to the market. However, car rental service providers will probably have a bigger advantage in this area, considering their much larger vehicle fleets.

The North American segment, which makes up almost 90% of the company’s value, currently has EBITDA margins of around 20%. We expect these margins to gradually expand over the course of our forecast period, reaching almost 24% by 2019.

We currently have a price estimate of $11 for Zipcar, which is around 30% above the market price.

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Notes:
  1. ZipCar Adds 2013 Honda Fit EV To San Francisco Car-Share Fleet, Green Car Reports, September 2012 []