The market has been impatient with Zipcar‘s (NYSE:ZIP) delay in achieving profitability and is even questioning whether car sharing makes for a sound business model at all. The stock has been out of favor with the market over the past few months, reaching a new 52-week low of $10 this month. However, the company’s established markets have demonstrated the business’ profitability potential, and we believe profits are being held down due to expenses related to growth initiatives rather than a poor business model.
Zipcar serves 700K members with a fleet of over 9K vehicles in North America and Europe. Apart from competing with traditional rental companies and car-sharing services such as Hertz On Demand, Enterprise’s WeCar, UHaul’s UCarShare and City Car Share, the company also faces competition from new low-cost, peer-to-peer (P2P) car sharing services such as RelayRides and GetAround.
When Will Zipcar Turn Profitable?
Zipcar has yet to post an annual profit. While the car sharing company posted its first quarterly profits over the last two quarters of 2011, it posted a loss last quarter due to seasonal factors. Nonetheless, the company is on track to become profitable this year and has even increased its earnings outlook for the current quarter. Its mature markets (Boston, New York, Washington, and San Francisco) have consistently demonstrated the business’ profitability potential. The total company’s profits are being held down due to expenses related to growth initiatives. Given the capital intensive nature of the car sharing business and the fact that Zipcar is still a very young company with a long runway of growth ahead of it, the margins could stay pressured for the foreseeable future. We expect profitability to improve gradually as new markets mature and penetration levels increase.
Increasing Penetration Is Key To Achieve Profitability
Zipcar’s primary goal is to increase penetration of it largest markets such as New York, Washington D.C., Boston and San Francisco. The company estimates that more than 9 million people that don’t currently have a Zipcar membership live within a 10 minute walking distance from Zipcar locations. We estimate that Zipcar currently generates an average $77 in revenue per car per day, up from $71 in 2010. We believe that figure could hit $85 as penetration and usage levels improve.
Plans To Bring Fleet Costs Down
Zipcar’s fleet is the company largest expense. In 2011, Zipcar significantly reduced its vehicle acquisition cost by purchasing vehicles through low-cost financing provided by an Asset Back Securitization (ABS) facility instead of leasing its vehicles. Zipcar’s fleet expenses fell from 70% of revenue in 2010 to 66% in 2011 as the number of vehicles under operating leases fell from 90% in 2009 to 50% in 2011. We expect these expenses to decrease further as a percentage of revenue as the company increases the percentage of its U.S. fleet funded under the expanded ABS facility. Over time, Zipcar targets to bring fleet costs down to 59-60% of revenue with improved vehicle financing and greater penetration in its key markets. If the company succeeds in doing so, its North America EBITDA margins could improve to 25-26% from the current 19%.
We have a $18 Trefis price estimate for Zipcar, a 70% premium to the current market price.
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