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Zipcar IPO: Scam of the New Century or the Future of Car Rentals?

Zipcar (ZIP), the car-sharing service that has come to define this innovative way of renting vehicles by the hour, staged a stunning IPO today that has seen the company's shares rocket from $18 to $28 on the first day of trading. Business Insider's Henry Blodget is appalled, alleging that the underwriters, Goldman Sachs and JP Morgan, set up a sweet pump-n-dump for favored clients.

Me, I'm just confused as to how anyone thinks Zipcar will ever make any money.

Car sharing is a fantastic alternative to both car ownership and the traditional -- and needlessly convoluted -- car-rental model. I'm on record as a big supporter, and for a while, I was a Zipcar client -- in car-crazy L.A., no less (Zipcar wound up merging with the service I belonged to, Flexcar). Still, when I ponder Zipcar's business model, I just don't get it.

Was it even worth $18 a share?
Zipcar has more than 500,000 members, a not insignificant tally when you consider that the new auto market in the U.S. at its height in 2005 was 17 million. The company has two key differentiators:

  1. Members pay for nothing except membership and hourly rental fees -- no gas, no insurance, no nuthin'.
  2. Cars are parked at numerous, easy to locate spots in car-unfriendly cities -- not consolidated at airports, as with major rental agencies -- and accessed for all practical purposes via cloud computing.
If this all sounds better than standing at the Avis counter, that's because it is. But the problem with anything involving automobiles as a business is that it inevitably entails high capital requirements. And Zipcar is no exception. Given its modest revenues, high operating costs, and historically non-existent profits, I can't understand why it was priced at $18, much less how it has rapidly appreciated by 50 percent.

Debt, debt, and more debt
The IPO was sold at a price that would enable Zipcar to shed some debt, so there's your justification for $18 (although $14 was floated pre-IPO). The company raised $174 million, but its 2010 revenues were only $186 million -- and two-thirds of that was gobbled up by maintaining a fleet of depreciating assets that, because they aren't centrally clustered and maintained, could be far less valuable as used cars once their Zipcar life is over.

Additionally, the debt that Zipcar wants to unload derives from its acquisition of similar services in the U.S. and Europe. If you're keeping track, that's a lot of M&A deals for the fledgling company, suggesting that natural growth may not be in its game plan.

You can see where this is headed: amassing debt to do the IPO, then doing the IPO to pay down debt, then using the market value created by the IPO to take on more debt. So you get bigger, you buy more competitors, you buy more vehicles, which cost more money to maintain -- and are under a lot of stress because in order for the business to succeed, renting by the hour, those cars need to not be sitting around un-driven.

Profits, ever?
SmartMoney thinks Zipcar is overpriced but potentially profitable -- on the assumption that it improves its balance sheets and leaves it relatively free of profit-sapping new debt.

But I don't see how the company gets off the debt train. And even if it did become profitable, by some combination of being the dominant player and expanding operations to places where people wouldn't rather just own a car, I think its margins would be very thin. So I find myself in a weird place with ZIP: love the company, hate the business.

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Photo: Wikimedia Commons
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