Back on August 2nd, Zipcar (ZIP) reported disappointing Q2 results and guided down for 2012 sending the stock down over 30% that day. Looking at the chart, the stock has absolutely collapsed since going public at $30 in April of 2011. Is Zipcar really this bad a company?
According to the company, it is the world's leading car-sharing network, with more than 730,000 members and 11,000 vehicles located in major metropolitan areas and college campuses throughout the United States, Canada, the United Kingdom, Spain, and Austria.
The company has had an absolutely miserable time in the public markets. Though seen as an innovative market leader, it has yet to have a positive run in the stock market. In fact, the stock has been on a steady down slope throughout the whole 16 months as a public company. In fact, the 50ema has rarely been breached while the 200ema has never been approached. Both are signs technicians use to identify a very bearish stock.
Q2 2012 Highlights
The company reported the following highlights from the Q2 earnings report:
- Second quarter revenue increased 15% to $70.8 million compared to $61.6 million in the prior year period
- Total members grew 21% from the prior year period to over 731,000 at quarter end
- Second quarter adjusted EBITDA of $3.4 million compared to $2.3 million in the prior year period
- Second quarter US GAAP net loss of ($422,000), or ($0.01) per share, compared to a loss of ($5.6) million, or ($0.17) per share in the prior year period
- Launched Zipvan service in Chicago and Toronto for a total of 165 Zipvans in five markets in North America and more than 200 Zipvans in the UK
- Launched in Austin, Texas with approximately 40 vehicles to complement existing university presence
The company reported disappointing Q2 revenue as the UK operations faced economic challenges. The situation will not likely improve in Q3 due to the congestion of the London Olympics limiting vehicle use. It also had a very disappointing first broadcast media launch that didn't help drive memberships in the U.S. as expected.
These lower than expected membership additions will lead to lower revenue expectations for the rest of the year as well. The company guided to between $272M and $278M for 2012. In response, analysts have dropped 2012 earnings estimates to $0.02 down from $0.12.
The company bought CarSharing.at to help expand the European network with the leading car sharing service in Austria. That company has approximately 200 vehicles and 10,000 members.
Just last week, Zipcar announced the immediate expansion of the Zipvan cargo van service to Seattle, Los Angeles, Philadelphia, and Portland. The company will also roll out the service to its remaining metro markets in North America over the next 12 months.
The company is also exploring a more holistic set of membership offers that will address a wider variety of member segments. The ideas include reducing the barriers to a trial and an option for past members that might need the service on a temporary basis. These members might no longer need the service full-time and any viable options might keep them using the service infrequently in the future.
It is also looking into complementary services such as peer-to-peer car sharing, ride sharing, and one-way, intra-city driving to further enhance the car-sharing mobility concept.
The market has seen more competition as the rental car companies slowly enter the market. The main threat appears to be from Hertz (HTZ) via Hertz On Demand. Hertz though appears as focused on buying Dollar Thrifty Group (DTG) and not cannibalizing the existing car rental business as taking on Zipcar.
Last March, Businessweek published an article highlighting how Hertz plans to push forward with all 375,000 vehicles in the U.S. fleet equipped with devices that allow customers to reserve and unlock a rental car. Oddly, though, the CEO was clear to point out the concern of cannibalizing the core business. This last part questions the real scale of the fleet in fact available for the car-sharing business.
The recent Zipcar earnings call suggested that competitive pressures aren't being felt as of yet. The retention rate remains high and non-competitive markets saw the same membership issues that impacted revenue.
Dollar Thrifty Buyout
The $2.6B deal to buy Dollar Thrifty by Hertz makes it the clear second place car rental company with nearly 24% of the market according to Bloomberg. Enterprise remains the market leader at 38% of the market. This leaves Avis (CAR) as the clear third place provider with 18.5% of the market and consolidates virtually all of the main rental company brands.
The deal gives Hertz access to mid-tier brands and the ability to compete on multi-pricing strategies. Unlike Enterprise and Avis, it lacked the multi-brands and thought adding the Dollar and Thrifty brands provided much more flexibility to compete on the global stage.
What it doesn't appear to do is increase the competition in the hourly rental and car-sharing markets. It is possible the mid-tier pricing is more appropriate for that segment though the company hasn't given an indication that is the reason for the merger.
The deal does make Enterprise, Hertz, and Avis as the dominant players in the domestic car rental sector with over 80% of the market. Interestingly it leaves Zipcar as a primary buyout target. The Bloomberg article mentions the market won't see further consolidation, but it clearly misses the new generation companies such as Zipcar. Not that the company is for sale, but one of these traditional car rental firms would undoubtedly find this firm appealing. Or another player might want to make a dramatic entrance into the market with a buyout of an innovative leader.
The chart remains hideous. It has continuously slid since first trading back in April 2011, making it possibly the only stock to never bounce. In fact, the stock hit a high of $31.50 on the first day of trading that it has never reached again. As an example of how bad the stock has traded, it slid to a close of $27.16 on the second trading day.
Clearly investors were overly exuberant about the service at the time of the IPO. The current price at just over 1x sales estimates for 2012 provides a lot more value considering slow growing Dollar Thrifty was bought out for 1.5x sales. Based on the approximately 42M shares outstanding, the stock was worth over $1.2B at the opening price. The stock now fetches only a fraction of that at $328M.
Chart - Zipcar
Absent a merger, Zipcar has the advantage of being an innovative company competing with the slow moving, mega firms. Not to mention, Hertz will be side tracked with the merger for the next 6-12 months, leaving Zipcar to forge ahead with even stronger leadership in the market. The car rental leaders appear more concerned about cannibalizing the existing business model than developing the car-sharing concept.
If Hertz really wanted to expand brands, why not buy Zipcar after the stock has crashed instead of Dollar Thrifty after it pushed that stock higher and higher the last few years?
Zipcar is clearly more appealing now than at any point in the past. The concept is more established than when it went public and the stock is a lot cheaper. All fast growing companies hit growth pains and this appears to be no different for this company. Investors should just be patient and let the downtrend play out. Once the chart improves, investors could reap sizable profits.
Disclaimer: Please consult your financial advisor before making any investment decisions.