Should You Take a Risk on This Week's Zipcar IPO?

Apr.11.11 | About: Avis Budget (CAR)

On Thursday, Zipcar takes to the NASDAQ, using the easy-to-remember ticker symbol ZIP. I had to delve into the rear portion of my over-extended brain, but, yes indeed, I was once a Zipcar customer.

While studying for the PhD I never finished (and I didn't even end up a Starbucks (NASDAQ:SBUX) barista) at the University of California-Irvine, I made frequent use of Zipcar's service. The setup could not have been more ideal for me, as a car-free person whose primary modes of transport are - in order - bicycle, my feet and public transportation. I lived in some of the best on-campus housing I've ever seen. The closest Zipcar lot was less than a five-minute walk from my apartment. Whenever I had to head from Orange County to Los Angeles to do research, I borrowed a Zipcar.

Zipcar's business model, from a geographical standpoint, has two focuses. One - large metropolitan areas. And, two -- college campuses. According to the company's most recent S1 filing with the SEC, the company started out smallish, but will storm head-first into considerable growth post-IPO:

We operate our membership-based business in 14 major metropolitan areas and on more than 230 college campuses in the United States, Canada and the United Kingdom. We target large, densely populated markets with high parking costs and strong public transportation systems. Based on these criteria, we initially focused our operations in three metropolitan areas: Boston, New York and Washington, D.C. These metropolitan areas have since developed into large-scale car sharing markets that continue to grow. We then applied our knowledge and experience to develop and grow additional markets, such as San Francisco, Chicago, Baltimore, Toronto, Vancouver and London as well as to university campuses. We further increased our geographic footprint to include Seattle, Portland, Atlanta, Philadelphia and Pittsburgh through a merger with Flexcar, Inc. in 2007 ...

We have identified more than 100 global major metropolitan areas and hundreds of universities as attractive markets for car sharing. Today, we operate only in 14 of these major metropolitan areas, which we believe have tremendous further potential for growth. We currently estimate that 10 million driving age residents, business commuters and university community residents live or work within a short walk of a Zipcar in the markets we serve. We do not expect that all of these driving age residents will become members of Zipcar or any other car sharing service. In addition, some may not qualify for membership in a car sharing service for many reasons, including lacking a valid driver’s license. Nevertheless, we expect that as we increase our fleet and our geographic footprint, the number of driving age residents living or working within a short walk of a Zipcar will increase.

Zipcar states that it has more than 560,000 members. I could not find an explanation in the S1 as to how they count members, but, for all I know, I could be included in that figure. I have not used Zipcar for about four or five years. If Zipcar uses the Pandora method of counting subscribers, I am probably one of the "proud" half million or so that receive the "Zipster" label from the company. My guess, and hope, is that Zipcar uses something closer to Snap Interactive's (OTCQB:STVI) math, which essentially only counts paying customers.

In any case, Zipcar's revenue has upticked impressively in the last few years. In 2006, Zipcar's revenue totaled $30.7 million. After cracking the $100 million barrier in 2008, Zipcar's revenues hit $131.2 million in 2009 and $186.1 million in 2010. The company reports a loss of $14.1 million for 2010.

I never play IPOs. I have several reasons for this. First, I am not a big enough gun to get in at the offering price. The last thing I want to be is some hack that chases an IPO after it opens considerably above the offer. Zipcar, for the record, plans to raise $89.2 million, assuming an offering price of $15, the mid-point between the $14 and $16 target range. And, most of all, you really don't know what you're getting with an IPO. They can report all of the growth they would like pre-IPO. It's so difficult to guess, in most cases, if they can keep it up as a public company. Because it's tough to judge fundamentals, and technicals do not yet exist, you're buying an idea, more so than you do when you get into a non-IPO stock that you happen to "like."

As much as I would like it to be more, I don't see Zipcar carving out much more than a niche. While niches can be successful, I don't like risking my money, at least as an investment, on them. I am more than happy to trade or speculate on niche stocks, but I would only go long on a handful of them, particularly the ones that fit into what I broadly define as the alternative transportation/energy market.

In some ways, I view Zipcar the way I see cycling as transportation. If everything lines up for a person, both present wonderful alternatives to the ball and chain of car ownership. But, everything must line up and that's not always easy.

You need to be in the ideal location for Zipcar to work for you. Of course, Zipcar management is smart. They target dense environments with either strong public transport or large numbers of people who do not own cars, but need to take somewhat frequent short trips. Great, worthy idea. But you need to be able to convince a large enough number of urbanites, for example, that the way they conducted business before Zipcar was so inefficient that they should plunk down the cash to become a Zipster. I just don't see it happening on a large enough scale. While they'll see continued success, I doubt Zipcar will ever come even close to having people wonder how they lived without them like they do an iPod or a mobile phone.

Zipcar also needs people to take the psychological jump. This notion relates to getting people to bike. No matter how many bike lanes you stripe, it takes a certain type of mentality to get somebody to gear up, risk their lives, and show up sweaty to work. It takes an equal leap of faith for many people, even urban dwellers, to give up their car. Certainly in the world's largest metropolitan areas - Manhattan comes to mind first - car ownership rates are incredibly low.

Outside of Manhattan, however, particularly in the U.S., people, with the exception of folks who in live in most dense urban neighborhoods (like San Francisco's Nob Hill), tend to view car ownership as a necessity, a social statement, or both. The last thing these folks will do is "slum it" with Zipcar. For a majority of Americans, the idea has little, if any, appeal. And don't forget, lack of a vehicle often does not occur by choice. Some metros that show low car ownership rates do so as a result of poverty and low income. The poor do not equal Zipcar's target market.

I have lived in, visited, and studied the cities Zipcar is in and plans to expand to. Even in the greatest urban places they list - San Francisco, Vancouver, Toronto - the battle rages between advocates and car drivers. In a nutshell, Zipcar amounts to seitan. You've likely never heard of it, and, unless you're a vegan or a few steps outside of the status quo, you wouldn't dare try it. Like cycling as transportation, riding public transit, joining the Peace Corps, or teaching English in Yemen, Zipcar is a noble venture ... for other people to partake in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.