Zipcar’s better mousetrap may give IPO a snap

April 4, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Who said there’s no value in building a better mousetrap? Not the backers of Zipcar. The U.S car-sharing company, a hit with city dwellers and college students, hopes to price its coming initial public offering far above the valuations attached to traditional car renters like Hertz and Avis. Yet Zipcar’s heady growth and market-disrupting business model make its targeted $600 million value look reasonable.

The company is the automotive equivalent of a time share — a hybrid of rental and ownership. Zipcar has the added advantage of convenience. It touts easy access for its 560,000 dues-paying customers to a fleet of 8,250 cars sprinkled around metro centers.

The model has taken off: expansions to 14 cities and over 230 college campuses, a six-fold surge in revenue in five years, and now a public listing. The fast growth has come at a cost, however. Zipcar has yet to make money. That’s a profile rather different from car renters. Wall Street forecasts single-digit revenue growth from stalwarts Hertz and Avis.

Comparing Zipcar to its older rivals’ margin and multiples would make the target price in the IPO, which aims to harvest some $130 million, look outlandishly expensive. It would be misleading, too. It also doesn’t factor in the customer stickiness and greater earnings visibility afforded by a membership-fee model.

Instead, assume Zipcar can grow sales by the 24 percent it achieved in 2009 (2010 is complicated by an acquisition) for three years. The rate is reasonable because car rentals are expected to pick up and Zipcar is still expanding. That would bring the top line to around $350 million in 2013.

In the last quarter, Zipcar reported an annualized EBITDA margin of 7 percent. The company is still establishing itself in many of its markets, but as it does so margins should increase. A three percentage point annual increase would lead to $57 million of these earnings in three years. That’s not impossible: restaurant reservation service OpenTable, which has a similar city-by-city strategy, went from 9 percent to 20 percent in one year.

Put those earnings on a multiple of 12 times — a 60 percent premium to rivals to account for its higher growth and more stable membership-based model — and the company is going public at a slight discount. That should make for a zippy market debut.

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It’s a very rosy picture indeed. That fact is that Zipcar is struggling with slowing growth, increasing competition – from so-called P2P car sharing and OEM’s like Daimler & BMW – and is simply unable to grow organically outside the USA in any meaningful way (let alone a non-English speaking culture). European markets are different, well developed, highly competitive, anti-American and already proven resistant to anything but acquisition. It is a great idea, but outside the USA, Zipcar is not the cool, hip ‘inventor of a category’ that it can gets to play at home. More like a take-over target for VW or Ford….

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