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This analysis of Zipcar (ZIP) was provided to TradingIPOs subscribers in advance of its IPO. On Wednesday, April 13, the company priced its initial public offering at $18 — above the previously expected range of $14 to $16 a share — raising more than $170 million.

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Zipcar plans on offering 9.6 million shares (assuming overs) at a range of $14-$16. Goldman Sachs and JP Morgan are leading the deal, Cowen, Needham and Oppenheimer are co-managing. Insiders will be selling approximately 3 million shares in the deal. Post-IPO ZIP will have 38.6 million shares outstanding for a market cap of $579 million on a pricing of $15. IPO proceeds will be used to repay debt taken on during an acquisition and for working capital.

From the prospectus: 'Zipcar operates the world’s leading car sharing network.'

There are 560,000 car sharing 'members, 8,250 Zipcars total, and 68 members per auto currently. An oddity here - over the past 2 quarters, ZIP has grown members from 470,000 to 560,000. However, the number of available autos has dropped from 8,860 to 8,250. More people, less autos available.

Self service vehicles located in reserve parking spaces throughout neighborhoods in large metro areas as well as college campuses. Target demographic is 1) urban dwellers needing a car a few times a month for either day or shopping trips; 2) college students without a vehicle.

They use a web and mobile app-based reservation model.

Vehicles are available for use by the hour or day. Fuel and insurance are covered in the price. Note, however, that there appears to be substantial evidence on the web of customers being charged by ZIP for damages done to cars. Prices average $6-$12 by the hour and $60-$80 by the day, with some busy weekends being up to $150 per day. ZIP appears to be attempting to manage auto inventory by shifting price based on demand, very similar to car rental agencies. 180 miles are covered in the price, additional miles are $0.45 per mile. I did a quick search in major metro areas and ZIP's rates are not really a bargain at all compared to the average auto rental. One day rates usually vary from $15-$45 in various metro areas. That does not include gas or insurance, although insurance is offered through major credit card programs. Plugging in $20 for gas (180 mile limit), one day auto rentals from car rental agencies run about $35-$65 with ZIP's all inclusive rates being $60-$70. With car rental agencies offering various reward programs for loyal and frequent users, there really is not much of an incentive currently for use of ZIP outside of college students too young to rent via auto rental agencies. ZIP is an alternative to renting a car from an agency, however not really a cost effective alternative.

The above is probably why ZIP operates on 230 college campuses throughout the US, but in just 14 non-university focused metro areas in the US, Canada and Europe. To me, ZIP's core user and growth niche would appear to be college students and those simply needing a vehicle for an hour or two once in a while. Not a bad alternative if seeking that timeframe, however not really a deal on price for much above that need.

Note also that cars are not generally cleaned between use. Often one driver drops off a car and another has it reserved soon after.

ZIP's slogan is a 'cost saving alternative to car ownership'. If one used ZIP's service for 5-6 days a month, one is looking at $350+ in monthly costs. Note that ZIP does not claim to be a cost saving alternative to traditional auto rentals.

Not knocking the service, simply pointing out on a cost basis, ZIP is rather pricey from all angles. The exception would be college students or others that needed a car for just 5-6 hours a month, not days.

Locations include New York, Boston, DC, San Francisco, Chicago, Baltimore, Toronto, Vancouver and London. In '07 ZIP merged with Flexcar and added Seattle, Portland, Atlanta, Philadelphia and Pittsburgh.

In April of 2010, ZIP acquired Streecar, a car sharing service in the UK. The plan is to expand into other European metro areas. Actually the plan is to rapidly expand into 100+ metro markets worldwide down the line.

ZIP utilizes each auto for 2-3 years.

Competition - Note that car rental companies have recently announced car sharing programs. As they have the inventory and the locations, they would seem to be a natural competitor. In addition some auto manufacturers such as BMW are rolling out car sharing programs.

Financials

$88 million in cash post-IPO, $20 million in debt. ZIP is intent on fast growth, expect the debt to stay on the books as the cash is used to fund growth.

ZIP has never posted a GAAP profit or positive cash flows.

2010 - Pro forma, assuming the purchase of Streetcar has occurred 12/31/09. $194 million in revenues, an increase of 25%+ from 2009. GAAP growth is stronger due to the acquisition. Fleet operations are the big expense here. They are dropping slowly as a % of revenues, however they are still in an area in which profitability will be very difficult. In 2010, fleet operation ratio was 66%. This is simply the cost of the vehicles in the fleet in 2010. Total operating expense ratio was 104%, net loss $0.25.

2011 - Much depends on rollouts in new areas. I would expect 20% topline growth to $233 million. Operating expense ratio should still be at least slightly negative. The combination of auto fleet expense and sales/marketing expense are making it impossible for a positive bottom line currently. Would expect a loss in the $0.15-$0.20 area.

Throughout the prospectus, ZIP attempts to position themselves as part of the new age/era of on-demand services. The difference here between ZIP and online and mobile operations is that ZIP is not running that sort of business model. ZIP is in reality an 'old-school' hefty inventory car rental service with a twist. The twist however does not mean ZIP operates on an inventory model any different than the large car rental agencies. As ZIP grows areas and members, they will need to grow inventory at roughly the same rate in order to fulfill members' demands for autos. A recent magazine article compared ZIP to OpenTable (OPEN), the reservation system. Yes, both tend to operate in major metro areas, but that is the extent of the similarity. OpenTable is an online service easily scalable without much additional investment, and no capital investments. ZIP is not, for reasons stated immediately above. ZIP has done a nice PR job attempting to position themselves as something different than their actual business model suggests.

Market leader in car sharing has a value. This deal is garnering some hype and honestly I've no idea if this IPO works initially or not. I have serious doubts however whether ZIP will ever be able to put much on the bottom line anytime in the mid or long term. ZIP is simply a different way to paint an auto rental company. Not a bad thing, however I'm not thrilled with either the financials or the hype here. Organic growth is not that impressive in mature markets (about 10% annually) and to date there really has not been much margin improvement. I foresee years of GAAP losses ahead here, not a deal I can recommend simply on that basis.

First mover, market leader. Could be a short term trade based on hype, however I question the longer term sustainability of the business model.

As a side note, one of the most annoying prospectuses I've ever read in regards to hype and 'new agey' catch words. ZIP, you are running a car rental operation with a small twist, you are not redefining modern living in a 'socially conscious environmentally aware' way...and yes the latter is their claim.

Source: Zipcar's Long-Term Sustainability Is Questionable