I see tremendous promise in Zipcar (ZIP). The company IPO'd in 2011 at $18 per share but started trading around $28. Since then, the stock has steadily declined, and it is now trading for around $11. Two concerns in particular have weighed on the stock: decelerating growth and emerging competition. I think the company is misunderstood. If it continues its solid execution, I think it could have an emerging competitive advantage and a long runway for growth. In this post, I provide some background on the company.
Zipcar is the world's largest car-sharing network. At the end of the first quarter, it had 709,000 members, to whom it provided access to a distributed network of more than 9,000 cars. Members pay an annual fee for access to the network, and usage fees to rent the cars by the hour or by the day. The company operates across nearly 20 cities and more than 250 college campuses, with new markets being added all the time.
Driven partly by acquisitions, Zipcar increased its revenue nearly eight-fold in the five years between 2006 and 2011. More recently, revenue growth has settled down to around 20%. The company breaks out results for four "established markets"-Boston, New York, Washington, D.C., and San Francisco.
On the one hand, these established markets may provide some useful information about where the business is headed. On the other hand, these four markets are particularly well suited to car sharing in a way that second-tier markets like Providence and Baltimore may not be. I would be careful about extrapolating too much from the experience of the established markets. Organic revenue growth and established market revenue growth over the past five quarters are shown in the following table.
Organic Revenue Growth and Established Market Growth
There appears to be a misconception among some investors that Zipcar relies on expansion into new markets for growth, and that it may have already tapped out the most promising opportunities. In contrast, I think Zipcar has barely scratched the surface of the potential in even its established markets, which are still growing revenue faster than 20%. Membership in the established markets stood at 361,000 at the end of the first quarter, compared to a total population of 30.5 million in those urban areas. Zipcar estimates that more than 10 million drivers live within a 10 minute walk of a Zipcar.
Zipcar positions itself as an alternative to car ownership. For urban residents who commute to work using public transportation, maintaining a car for occasional errands or weekend trips is an expensive proposition. Zipcar claims that the average member saves more than $500 per month by using Zipcar in place of owning a car. Just as importantly, Zipcar members avoid the hassles of vehicle maintenance, finding parking, buying insurance, or even paying for gas.
Zipcar was profitable in the last two quarters of 2011 but has never had a full year of profitability. The business is mildly seasonal, and the company posted a small loss in the first quarter of 2012. As of this writing, consensus estimates call for $0.12 of earnings for 2012 and $0.35 for 2013, so the stock is trading for 92 times current earnings and 31 times forward earnings, respectively.
While on the surface this may seem rich for a GARP story, keep in mind that the company is just now reaching profitability. A fair valuation will depend greatly on what happens to margins. The fully diluted share count is around 43 million, giving Zipcar a market cap around $470 million. This is 1.6 times projected sales for 2012, or 1.3 times projected sales for 2013. If Zipcar can eventually achieve a 10% net margin and trade for a P/E of 20x, a fair P/S multiple would be 2 (net margin times P/E).
As a reasonable base case, let's assume that revenue growth decelerates to 15% annually over the next five years, in which case sales would be $486 million in 2016. If Zipcar trades for 2x sales, it would be worth $972 million: approximately a double over five years, assuming they didn't issue any new equity in the meantime.