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Shares of Zipcar (ZIP) have shown some strength in recent weeks. After trading as low as $6 in the beginning of November, shares have returned some 35%, currently trading just above the $8 mark. A decent third quarter earnings report sent shares back higher, but shares still trade at historically depressed levels.

Third Quarter Results

A little over two weeks ago, Zipcar reported a decent third quarter earnings report. Revenues rose 15% on the year to $78.2 million. Revenue growth was driven by a 18% increase in the number of members which rose to 767,000.

Adjusted EBITDA came in at $6.5 million, compared to $4.6 million in the third quarter of 2011. Consequently, EBITDA margins came in at 8.3%, up from 6.8% in the third quarter last year.

GAAP net income rose from $651,000 to $4.3 million, with diluted earnings per share coming in at $0.10. Earnings were boosted due to the sale of $1.7 million in zero emission vehicle credits.

CEO and Chairman Scott Griffith commented on the results, "With our strong results in the quarter, we have raised our full-year guidance and we are on track to deliver 2012 as Zipcar's first year of profitability on a US GAAP basis."

Detailed Information

Zipcar operates a fleet of 10,645 vehicles which generate annual revenues of $65 per day, unchanged compared to last year.

It is disappointing that average revenues per member fell by 4.6% to $103 per member for the period. The costs to attract new members rose 27.3% to $70 on average. Retention rates were unchanged at 97.3%.

Outlook

For the fourth quarter of its fiscal 2012, Zipcar anticipates revenues to come in between $67 and $71 million. At the midpoint of the forecasted range, this implies 9.7% revenue growth compared to last year's $62.9 million in revenues for the quarter.

Adjusted EBITDA is expected to come in between $4.5 and $7.5 million, with GAAP net income expected to come in between 0 and $3 million.

As such, full year revenues are expected to come in between $275 and $279 million. Full year adjusted EBITDA is expected to come in between $14.5 and $17.5 million, with GAAP net income expected to come in between $1 and $4 million.

Valuation

Zipcar ended its fourth quarter with $91.6 million in cash, restricted cash, equivalents, short term securities and long term marketable securities. The company operates with $133.5 million in short and long term debt, for a net debt position of roughly $41.9 million.

For the first nine months of 2012, Zipcar generated revenues of $208.2 million. The company reported a net income of $571,000, or $0.02 per diluted share.

The market currently values Zipcar at $337 million. Based on the company's full year outlook, this values the company at 1.2 times annual revenues and roughly 135 times annual earnings.

Some Historical Perspective

Year to date, shares of Zipcar have lost roughly 40% of their value. Shares advanced from $14 in January to highs of $16 in February. Shares kept falling on a lower guidance for the remainder of the year. Shares hit lows of $6 at the start of November, currently exchanging hands at $8 per share.

Zipcar went gone public in April of 2012 at a price of $18 per share. Shares quickly advanced to highs of $29 per share and have lost roughly three quarter of their value. Between 2008 and 2012 the company grew revenues from $106 million to an expected $277 million this year. The company reported a $14.5 million loss in 2008, and is expected to be profitable for the full year of 2012.

Investment Thesis

Shares of Zipcar have rebounded recently on the third quarter report. Revenues grew some 10.4% on a quarterly basis, indicating the strength of the performance in the third quarter. The guidance for Zipcar's fourth quarter revenues indicates that revenues will fall 11.8% on a quarterly basis, which compares to a 7.6% decline in quarterly revenues in the fourth quarter last year.

Zipcar showed strong revenue growth, driven by growth in its membership basis. Average revenues per user are under pressure, while customer acquisition costs are on the rise. Despite this dangerous cocktail, it only costs Zipcar some two months of average revenues to a attract a new member.

Many commentators have pointed out the competition from traditional car rental companies such as Hertz (HTZ) and Avis (CAR). These competitors are much more focused on business travelers and holiday rentals, which both thrive on a strong economy. However these competitors are large and are slow to react to Zipcar's target audience. Many consumers associate the competitors with overpriced services when they go on holiday for one day or more. Zipcar targets to sophisticated audiences in large cities which do not own a car, but need one for a couple of hours.

I think the recent share decline might be overdone a bit. The company operates without large amounts of debt, and is expected to be profitably for the full year. The strong growth in new areas, implies that "mature" markets including San Francisco, Boston and New York are solidly profitable, given that start-up markets are loss making.

Given the limited market capitalization, the large growth opportunities, and the improving operational performance, shares might be worth the gamble. While competition might come from different angles, it might also provide investors with an exit-opportunity in case a new entrant, or competitor is willing to pay a significant control premium.

With shares off over 50% of their public offering price, shares might be worth the gamble.

Source: Zipcar - Shares Are Worth The Gamble After Trading 70% From Their Highs