Why I Think You Should Sell This Car Renter Now

Car-sharing leader Zipcar (NAS: ZIP) may look like it stepped on the gas in the third quarter as earnings showed it zipping ahead, but I wouldn't be too quick to drive off with the stock. You're likely to end up in the breakdown lane if you jump in here.

Zippy performance
Zipcar moved a step closer to profitability when it said revenues jumped 15% as membership rolls rose 18%, which says people are joining up but not fully using the service. That means they'll rethink that decision later on when it comes time to renew, and probably opt out.

I admit that the logic of renting a car for a couple of hours for more than what it would cost me to get it for a full day from the likes of an Enterprise Rent-A-Car escapes me, but I guess there's some sense in urban settings at least for drivers to opt for a pick-up-and-go service. But competition from better-financed rivals like Hertz (NYS: HTZ) show Zipcar's dominance may be fleeting.

Zipcar, which has been around for more than a decade (since 2000, actually), has 767,000 members, yet Hertz on Demand, which only launched in July , has hit 166,000 members, a 170% increase in membership while revenues surged 70%. Hertz, with its better marketing prowess, already has nearly a fifth of the members its rival does.

Stuck in traffic
And there's more competition besides, including Daimler's car2go, Enterprise's Mint Cars, and to a lesser extent, Avis (NAS: CAR) , whose On Location service is geared more toward its corporate customers than as a residential car-sharing service.

As the competition grows, Zipcar is going to face pressure to eliminate its annual membership fees, which will be a real blow to its revenues, particularly as they factored so heavily in its results this quarter. When priceline.com (NAS: PCLN) eliminated booking fees a few years ago, it wasn't long before Expedia (NAS: EXPE) and Orbitz (NYS: OWW) were forced to follow suit. Expect Zipcar to cave in as well on its pricey $60 to $100 application and membership fees, which represented 14.3% of its revenues in the third quarter, up from 13.6% last year.

Hertz, which is trying to buy Dollar Thrifty (NYS: DTG) , might end up pushing its On Demand service even harder if regulators get stuck on industry competition issues. The acquisition would leave just three players controlling 95% of the car rental market. It already plans on converting its entire 375,000-vehicle fleet to be able to connect with the on-demand service. Each car will come equipped with an RFID chip that will enable customers using a computer or their smartphone to reserve and unlock a rental car. That would equate to a fleet 30 times the size of Zipcar's.

The short story
Yes, I've been bearish about this stock for some time (the stock is down 47% since I weighed in on it in February on Motley Fool CAPS compared to a 1% rise in the S&P 500), and there's little to suggest anything's really changed my outlook on it.

Zipcar's stock got a bigger than usual bounce because it was heavily shorted, but once the squeeze wears off, you can expect the car-sharing service to once again have four flat tires and be up on blocks. For investors who have been waiting for a rebound, I'd use the surge to cut my losses and get out. Car rental agencies around the globe have reported better-than-expected numbers -- even priceline's RentalCars.com was a big contributor to its surprisingly strong quarter -- so don't read anything special into Zipcar's results.

But let me know in the comments box below if you disagree with my bearish outlook and see a reason that its higher-cost service will be able to beat the competition across the finish line.

Waiting for a tow
I may not be ready to put the pedal to the metal with Zipcar, but others think it may be time to back up the (rental) truck and buy more. The Motley Fool's top Zipcar analyst wills tell you what everyone --and apparently me --is missing about Zipcar today in his premium research report on the company. Click here now for instant access.

The article Why I Think You Should Sell This Car Renter Now originally appeared on Fool.com.

Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings, priceline.com, and Zipcar. Motley Fool newsletter services recommend priceline.com and 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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