How Low Will Zipcar Go?

Shares of Zipcar (NAS: ZIP) hit a 52-week low on Friday. Let's look at how it got here and whether darker days lie ahead.

How it got here
Zipcar's fall has been more about expectations than a huge weakness in the business. First-quarter revenue was up 20% from a year ago to $59.1 million, and a $0.08 loss per share still beat estimates. But projections for the full year fell short of estimates, and when you're new to the market, that can leave investors disappointed.

The last year hasn't been great for car rental companies in general, and Zipcar seems to be heading in the opposite direction of its chief rivals. Hertz Global (NYS: HTZ) and Avis Budget Group (NAS: CAR) are in full recovery mode after a rough few years. Meanwhile, the market hasn't quite bought into Zipcar's story yet.

ZIP Chart
ZIP Chart

ZIP data by YCharts

There are often challenges in turning an industry on its head, and Zipcar is still in the early stages. Whether it will be a long-term success is difficult for anyone to tell. Ford (NYS: F) is betting that the company's focus on college campuses could cultivate a new generation of car buyers, and General Motors (NYS: GM) is adding Chevy Volts to Zipcar's fleet, hoping to demonstrate the vehicle's advantages to a wider audience, so there's at least intrigue from the biggest names in the car business.

But Zipcar has had to deal with relatively little competition, something that may soon change. Hertz is entering the space and there's no reason Avis or any other rental car company couldn't if the business model is deemed a success. Just when losses are turning into profits, the vultures are coming out.

What's next?
A bet on Zipcar right now is really a bet on a model for transportation that will take root in the future. The idea of having a car available only when and where you need it is appealing, but not everyone can opt into this alternative mode of transportation. On top of that, some markets look less than ideal for the Zipcar model. New York, San Francisco, and Boston are more profitable than smaller markets right now and make a lot of sense for members, but there are only so many dense, urban cities for Zipcar to penetrate.

The stock isn't exactly cheap, either, pricing in a high level of growth in the future. Shares are going for 29 times 2013 earnings estimates, which have been falling in recent months. CAPS members are still on board, giving the stock a four-star rating out of five, but I'm more cautious. Upending a market like this is tough, and the rental car business has never been a great return on investment. Until Zipcar can show a consistent profit, I'm going to have to sit on the sidelines. I'm just afraid the bottom line won't ever be zippy enough for me.

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At the time thisarticle was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Zipcar, Ford Motor, and Hertz Global Holdings. Motley Fool newsletter services have recommended buying shares of Zipcar, Ford Motor, and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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