Why Zipcar's Zipping Ahead

Car-sharing service Zipcar (NAS: ZIP) reported its third quarter earnings after the market closed Thursday and, in after-hours trading, shares have gained 25%. While Zipcar put in a solid quarter, beating revenue estimates, growing the membership base, and raising full-year guidance, the real news was CEO Scott Griffith's announcement that, in 2012, the company will be profitable.

In the third quarter, revenue increased 15%, from $68 million to $78 million. Members, whose fees accounted for 14.3% of revenue in the third quarter, grew 18%, to nearly 770,000. Zipcar also launched in Miami, marking the 20th major metropolitan area to host a Zipcar presence. Most importantly, quarter earnings increased a whopping 560% from the third quarter of 2011, from $651,000 to $4.3 million. This puts the company on track to earn an annual profit for the first time in its history of between $1 million and $4 million. Zipcar's chronic annual losses have been a major drag on the company's share price.

The reason Zipcar has taken so long to realize profitability is that it has reinvested revenue into rapid growth, both organic and through acquisitions. In only a decade, it has expanded from three cities on the Eastern seaboard to 20, with a presence on 300 college campuses. All that growth is expensive, and new operations are not immediately profitable, because the company needs some time to scale up and recruit members.

Accordingly, Zipcar traditionally breaks out the performance of its "Established Markets" in its earnings report. Zipcar currently considers its operations in Boston, San Francisco, New York, and Washington, DC to be Established Markets, and these markets have actually been profitable for several years. What's happened in 2012 is that income from mature operations have finally overcome the company's heavy -- and ongoing -- investments in new markets.

While Zipcar's inaugural year of profitability is an important milestone, it's important to put that in perspective. If Zipcar hits the high end of its earnings guidance, it will still sport a price-to-earnings ratio of 60, more than four times as expensive as the S&P 500 average. Will Zipcar's years of investments produce enough income to justify its high valuation?

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The article Why Zipcar's Zipping Ahead originally appeared on Fool.com.

Fool contributor Daniel Ferry owns shares of Zipcar. The Motley Fool owns shares of Zipcar. Motley Fool newsletter services recommend Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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