Zipcar’s Profitability Improves Despite Big Investments

by Trefis Team
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Zipcar (NYSE:ZIP) announced its Q1 results with its revenues increasing 20% with 23% higher membership compared to the same period last year. Zipcar now serves more than 709K members across North America and the U.K. While the car sharing company posted its first quarterly profits over the past two quarters, it also posted a loss this time due to seasonal factors. Nonetheless, the company is on its way to post its first annual profit this year, and has increased its profitability outlook for the current quarter.

Zipcar serves 673K members with a fleet of over 9K vehicles in North America and Europe. 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 serviceslike RelayRides and GetAround.

See our complete analysis for Zipcar’s stock

Established Markets Growth Demonstrate Profitability Potential

The established markets of Boston, New York, Washington, D.C. and San Francisco saw a 20% y-o-y growth during the quarter driven by new member additions, suggesting that the already profitable markets yet have more potential for growth and profitability through increased penetration. Zipcar currently estimates more than 10 million drivers live within a 10-minute distance of a Zipcar location – and this a huge potential market. The company’s margins have also improved with continued improvement in key performance metrics like usage revenue per vehicle per day.

However, Zipcar’s future growth will be challenging with more competition from new players entering its markets. Its leading market of Washington D.C. recently saw the entry of two new players, Hertz’s On Demand and Daimler’s Car2Go, that are challenging Zipcar’s monopoly with their flexible membership terms and one-way rental facilities, attractive pricing, as well as efforts to match up to Zipcar’s technology.

Improves Outlook For 2012

The company expects revenue growth of 20% in 2012. Zipcar has also upgraded its full year 2012 profitability outlook with its adjusted EBITDA now expected between $16 and $20 million from previous $15-$19 million, and net income of $3-$7 million from previous $2-6 million. The upgraded profitability outlook is positive news, especially as it comes at a time when the company is making huge investments in marketing and expanding to new markets like San Jose and diversifying to new services like Zipvan and Electric Vehicles. It has also been trying to bring down its vehicle acquisition costs in the U.S. through asset-backed security (ABS) facility.

Zipcar is a young company with growing capital investments to expand into newer markets, and hence its margins are likely to stay under pressure in the near future. Nonetheless, the company is looking at a significant car sharing market opportunity with leading market position, and the margins should improve as it continues to grow in strong double digits over the next decade.

We are in the process of revising our $22 Trefis price estimate for Zipcar.

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