By David Sterman
To succeed in a new business, companies look for opportunities with little competition and wide barriers to entry. When I took a position in Zipcar (Nasdaq: ZIP) in late January, I saw the burgeoning car-sharing company checking only one of those two boxes. Competition was minimal, excepting a half-hearted entry from Hertz (NYSE: HTZ) and a few tiny players. But the barriers to entry were admittedly low, especially for any firm with deep pockets.
Well, it's that second factor that has home to roost. German auto maker Daimler (Pink Sheets: DDAIF) is quickly ramping up with a rival service known as Car2Go. You may not be familiar with the service just yet, since it is only offered in Austin, Texas, and San Diego. The company currently has 70,000 members, roughly one-tenth the customer base of Zipcar, but that appears set to change thanks to recently announced expansion plans.
In just the past few weeks, Car2Go has announced plans to move into a broadening number of U.S. and European cities. For example, the company just announced plans to make a big push in the U.K. this fall, which had been expected to be a big market for Zipcar. Here at home, an imminent move into markets such as Portland, (March 24), Washington D.C. (March 31) and other states will give Zipcar direct competition right at the height of the company’s spring and summer peak periods. Car2Go will be offering all-electric cars in San Diego, giving the service green credentials.
The service is priced similarly to Zipcar, using Daimler's Smart Car as the primary platform. Car2Go offers a bit more flexibility in terms of pricing, while Zipcar offers greater choice in terms of locations. It's too soon to know what this will mean for this market. Perhaps it is big enough to support two major players. (Three, if you count Hertz.).
But two things are clear. First, Car2Go is likely to be a formidable competitor in Europe, which had been shaping up to be a key expansion market for Zipcar in 2013 and beyond. Second, and more important, the mere perception of a heated rivalry, while good for the consumer, could be bad for both companies involved. This is a zero sum game, and in a battle for market share, both Zipcar and Car2Go may seek overzealous pricing or supply of vehicles. It's the mere perception that such a scenario may take place which explains why the investment thesis has changed for me.
Note that the March quarter is seasonally weak for Zipcar, and management has already cautioned of a spike in expenses for the quarter, which may or may not be baked into analysts' models. This factor, along with the rising buzz Car2Go will seek to generate, could push this stock down toward the $10 mark.
I will sell my 400 shares of Zipcar and close out the position two trading days after you read this. Shares have re-traced half of their losses since swooning in February, which strikes me as an opportune exit point.
If the stock does indeed drop to $10, then investors may want to revisit the math on Zipcar's long-term profit potential, as it may represent real value. I continue to believe that Zipcar is building an asset that will be of great value to a larger transportation-oriented firm that wants to enter into this space. And that possible move to $10 could set the stage for M&A chatter.
Disclosure: David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of ZIP in one or more if its “real money” portfolios.