Will ZipCar's IPO Pay Off Better Than the Tesla IPO?

| About: Tesla Motors (TSLA)

by Jeff Siegel

It's amazing how much attention this latest Tesla IPO is getting. The company goes public tomorrow, but they've been building this one up for months.

Although, as I wrote last week, I'd wait until the initial smoke clears before taking a closer look.

In the meantime, there's another company that's recently announced an IPO. And despite the lack of hype, it's actually a pretty interesting story — and definitely worth a look. Back in 2006 I wrote about a growing trend called car sharing, where I highlighted a car sharing company called Flex Car. Well, Flex Car merged with another car sharing company called ZipCar in 2007.

Now ZipCar is going public.

I'll get to the nuts and bolts of this $75 million IPO in just a minute. But first, let's take a closer look at this car sharing trend that's gaining in popularity throughout the nation's cities.

What is "car sharing"?

Wiki's definition of car sharing is pretty accurate:

It is a mode of car rental where people rent cars for short periods of time, often by the hour. They are attractive to customers who make only occasional use of a vehicle.

While those who live in the suburbs or in rural areas pretty much have to drive everywhere (and do need their vehicles on a daily basis), those who live in our nation's cities often rely on public transportation or — and hold on to your seats — walking!

The advantage to living in the city is that everything you need is typically within a close distance. In fact driving anywhere in the city rarely makes sense, since drivers have to not only pay for gas, but also shell out small fortunes for parking. Nonetheless, many who live in the city still need cars for those occasions when mass transit or a bike ride isn't an option.

And that's where car sharing comes into play — offering city dwellers an opportunity to avoid the hassles of owning a car (i.e. insurance, registration, parking, etc.) and save quite a bit of green in the process. According to ZipCar, the leading car sharing company in the United States, members of the service report an average monthly savings of more than $500 compared to car ownership.

So how does the ZipCar model work, and how profitable can ZipCar be for investors?

The ZipCar Model

It works like this:

You sign up for a ZipCar membership (a $50 annual fee). Once you're approved, you get a membership card (a Zipcard) that you use to reserve a vehicle. Whether online or over the phone, members choose the car they want — everything from BMWs to hybrids to MINIs to pickups — and request a particular time slot and the location from where they plan to pick up the car.

When you go to pick up your car, your Zipcard unlocks the doors. Then you drive off.

When you're done, simply return the vehicle back to the spot where you picked it up.

It's quite easy, and much more convenient and cheaper than renting a car... Because not only are the rates pretty competitive, but you get a few important bonuses with your membership, including:

  • Gas - That's right, ZipCar pays for the gas.

  • Insurance – ZipCar provides coverage up to the state-mandated levels. So no, you don't have to come out of pocket for that. Whereas with rental car companies, they always hit you up for those extra insurance fees.

  • Miles – Each reservation comes with 180 free miles per day.

When you really start breaking down the costs of car ownership and car sharing, it's easy to see why so many folks who don't need a vehicle on a regular basis are going this route.

In fact, ZipCar says it took two years to get its first 1,000 members. Today, the company gets the same amount in just a few days. The potential here is pretty impressive.

ZipCar even makes a point to spell out the cost savings to potential members with a savings calculator.

All in all, it's a pretty promising model with the potential for some serious growth, as more and more folks move to the cities and oil prices head north.

Anything here for investors?

Like many companies going public these days, ZipCar has posted losses every year since it started.

And those losses are expected to continue this year and into 2011.

That being said, ZipCar's got a nice little operation going – with limited competition right now.

For the three months ended March 31, ZipCar's revenue climbed 22.5% to $33.24 million; although net loss did increase from $2.97 million to $5.3 million.

ZipCar also has a pretty sizable debt load with some pretty sizable interest rates. I have no doubt that a chunk of what it raises through its IPO will go to pay down some of the company's debt.

But despite a history of losses and some uncomfortable debt (about $30 million worth), you can't dismiss a company that boasts 400,000 paying members and more than $130 million in total revenue in 2009. Not in this market.

Like anything these days, the risk is real. And ZipCar isn't shooting out of the gates as a highly profitable company. If it was, I suspect there would be a lot more hype about this IPO...

The truth is that much of ZipCar's success hinges on whether or not car sharing will continue to experience robust growth.

If you believe that car sharing is just one more logical evolution when it comes to personal transportation, then certainly this is the car sharing company to watch. If you don't think this trend has any real teeth, then ZipCar is probably not for you.

Personally, I believe car sharing is proving to be another transportation alternative that has a legitimate shot at changing the personal transportation landscape.

So we're going to keep a close eye on this one. And if an opportunity presents itself, we'll be sure to let you know.

Disclosure: No positions