Zipcar (NYSE:ZIP) is a membership based, car sharing company that serves over 673K members with a fleet of over 9K vehicles in North America and Europe. The company enjoyed a successful IPO in April 2011 and posted its first two profitable quarters over the second half of 2011. The car sharing company grew its membership by 25% in 2011, leading to 30% higher revenues compared to the previous year. An improved mix of revenues and access to cheaper vehicle financing also resulted in better margins despite a net loss for the full year. As margins continue to pick up, the company is on its way to post its first annual profit in 2012.
Aside from competing with traditional rental companies and car-sharing services like Connect by Hertz, Enterprise’s WeCar, UHaul’s UCarShare and City Car Share, it also faces competition from new low-cost, peer-to-peer (P2P) car sharing services like RelayRides and GetAround.
The global car sharing market could exceed $10 billion by 2020, and Zipcar is currently the leading market player in the segment with first-mover advantage and significant brand cache. During 2011, its membership grew by 25% in North America and Europe. The company has turned aggressive in its European expansion after completing the integration of Streetcar’s operations in the U.K. in 2011. It recently acquired a majority stake in Barcelona’s Avancar and appointed its first president of Zipcar Europe.
Frost & Sullivan research estimates that by 2016, the North American car sharing market could surpass 4.4 million members and $3 billion and the European car sharing market could surpass 5 million members and 3 billion euros. We currently estimate Zipcar Membership in North America could reach 2 million and Zipcar Europe membership could cross half million over the next decade.
Improving Margins With Cheaper Fleet Financing
Car sharing is a highly capital intensive business in which fleet costs constitute the biggest expense. Zipcar has significantly reduced its vehicle acquisition costs over the past year by shifting from leasing vehicles to purchasing vehicles through Asset Backed Securitization (ABS) facility that provides it access to low-cost vehicle financing. It recently doubled the ABS facility to $100 million to fund its domestic fleet expansion in 2012. Lower cost for vehicle financing will further help Zipcar’s bottom-line.
Fleet costs currently constitute 66% of Zipcar’s revenues compared to 71% in 2009. This reduction happened as Zipcar started phasing out vehicles under its operating lease in the U.S. and replaced them with vehicles purchased through the ABS facility. The number of vehicles under operating leases fell from 90% in 2009 to 50% in 2011 and is expected to continue to decline.
3 Key Risks Ahead
Competition Turning up the Heat
Zipcar presently occupies the largest market share in the car sharing market exceeding 50% in North America and has established a brand synonymous with car sharing. However, going forward, we expect the company to face stiff price competition from car rental giants like Hertz and Enterprise that have launched their own car-sharing segments like Connect and WeCar with relaxed membership fees and one-way rental facilities to lure customers.
It also faces new competition from up and coming low-cost, P2P car sharing services like RelayRides, GetAround, Sprideshare and Jolly Wheels. By investing in smart web interfaces, online marketplace, smartphone apps and car-kits to enable keyless entry, P2P players such as RelayRides and GetAround are making credible attempts to match Zipcar’s accessibility and convenience with the cost advantage of not requiring to purchase or rent a fleet. Zipcar has also recently invested in Wheelz, a peer-to-peer car sharing company targeting college campus communities, acknowledging the potential of P2P sharing business model.
Slower Market Growth
We currently estimate Zipcar Membership in North America to reach 1.9 million by the end of the Trefis forecast period. However, there could be a 20% downside to the Trefis price estimate if market growth is slower and Zipcar Membership in North America manages to reach just 1.5 million by the end our forecast period due to slower market growth and stiff competition with other car sharing companies like Hertz Connect, Enterprise’s WeCar and UCarShare.
Weaker Margin Expansion
Another risk to the company could be slower improvements in profitability owing to the capital intensive nature of the car sharing business. We currently estimate Zipcar’s EBITDA Margin to gradually increase to 23% by the end of the Trefis forecast period. There could be a 25% downside to the Trefis price estimate if the company fails to improve its EBITDA margins beyond 20% by the end of the Trefis forecast period due to a delay in reaching profitability due to high fixed costs as well as the likelihood of price wars due to increasing competition.
We have a $22 Trefis price estimate for Zipcar.