Investing in any recent
initial public offering (IPO)
carries one obvious risk: You may be buying as insiders and
underwriters are getting set to sell. By federal law, these folks
are "locked up," prevented from selling stock for 180 days after
. When they can finally turn their pre-IPO stock into cash, they
So as soon as
backers and founders could sell
in mid-October, they didn't hesitate, unloading more than 3 million
shares by year's end. As a result, an IPO that closed at $28 on its
first day of trading last spring now trades below $15.
That's a fresh opportunity for the rest of us, as Zipcar still has
the makings of a solid growth story. It's also why it will be the
next addition to my
$100,000 Real-Money Portfolio
For the uninitiated, Zipcar rents cars and vans to its members by
the hour or by the day. The service has quickly caught on with
younger urban consumers in the United States and Europe as a
youthful brand that is spoken of in the same context as
JetBlue (Nasdaq: JBLU)
Apple (Nasdaq: AAPL)
. Members are known as "Zipsters" (which is painfully close to
Hipsters). Sure, you could rent a car from
, but a Zipcar membership is much cooler, more flexible -- and
quite cost effective.
Zipcar got its start in 2000, right as the dot-com boom was ending.
Attracting funding and getting the business off the ground took
time: The company needed seven years to get to 180,000 members.
Three years later, that figure exceeded 600,000 members.
To be successful, Zipcar needs to be sure that its 10,000 cars stay
as busy as possible (known as utilization). When Zipcar penetrates
, utilization is typically below 50%. As a market matures, that
figure moves up to around 65%. The difference is crucial: Zipcar
likely loses money in new markets and only makes money once a
market matures. (Utilization is about 15 percentage points higher
on weekends, and is also much higher in the June and September
quarters.) Notably, Zipcar's steady expansion into new immature
markets explains why the company is still unprofitable. (Although
the company says 10 of its 15 first markets are now profitable).
It's hard to speak of any of Zipcar's markets as truly mature. Even
in places like Boston or New York, membership continues to rise at
a double-digit pace as more consumers finally decide that owning a
car in a parking-constrained city isn't worth the hassle.
At first blush, this may seem like a business with few barriers to
entry. For example, Hertz began a similar service in 2010 (and now
has 70,000 members), and a half-dozen similar firms in the United
States are in operation. Still, Zipcar controls more than 70% of
the U.S. market.
With a major presence in only a handful of major cities such as New
York, Boston and Washington, Zipcar has only scratched the surface.
Worldwide, there are more than 400 cities with at least 1 million
people. That's likely the minimum size market for Zipcar to get the
utilization it needs. Zipcar aims to enter two to three new cities
each year. Although most of the efforts have focused on North
America recently, a steady push into the U.K. and Spain highlights
management's expectations for the next leg of growth.
Analysts had been expecting Zipcar to finally become profitable at
some point during 2012, but a surprise
in the third quarter of 2011 moved up that timeline, thanks to
higher fleet utilization. The December and March quarters are
seasonally a bit weaker, and investors may have to wait until the
second quarter of 2012 to see Zipcar's profits in the black again.
Analysts think Zipcar will make $0.10 to $0.15 a share this year,
reversing a likely $0.35 to $0.40 loss in 2011.
Frankly, focusing on profits is a mistake. Indeed, this company
will be generating negative
for the next few years, regardless of the appearance of actual
rules. The company's rapid expansion plans will rely on every
dollar coming in going right back out. Instead, investors need to
focus on sales growth, fleet utilization, customer churn rates,
margins and other metrics. Luckily, the company delivers all that
and more each quarter. The key to this investment: that those
metrics keep moving in the right direction.
On a most basic level, the fact that sales are likely to grow
around 25% in 2012 to around $300 million is the primary focus
right now. (The current consensus forecast of 20% growth appears
too conservative.) I base that assumption simply on expected
further growth in existing cities along with the entry into a few
new cities in 2012. Sales could keep growing at a 20% to 25% pace
into the middle of the decade, which is why this stock appeals to
me. By 2013, the higher sales base should really translate into
on a per-city basis and across the company's entire
The Downside Protection -->
To be sure, this stock does not enjoy the downside support my other
portfolio holdings possess. Shares could easily move toward the $10
mark (from a current $15) if growth materially slowed and 2012
top-line gains came in below that 25% target. Still, Zipcar's $600
appears to discount all of the funds that have gone into this
. If growth hit a speed bump, then other firms may look to
at least $600 million for the existing platform of business.
Upside Triggers -->
So how do you value a business that has fast-rising sales but a low
level of current profitability? Enterprise value-to-sales is likely
the best metric. You should use this metric when a company's sales
base isn't quite large enough to show what peak margins will look
like. That figure currently stands below 2, but should be closer to
three or four, especially in light of the solid sales growth
projections. In fact, that's how this stock was valued last spring,
well before the prospect of selling insiders was digested by
investors. As that selling winds down, I expect that multiple to
rebuild, and shares to move back up above $25 -- at least 66%
higher than current levels.
Action to Take -->
48 hours after you read this, I will buy 400 shares (or roughly
$6,000 worth) of Zipcar. That position could grow in size if
upcoming quarterly results are solid and shares remain in the
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA, F, CREE, HAS in one or more if its "real money"
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