Why Zipcar Is Worth $18

Zipcar’s stock suffered another attack of investor doubts and pessimism on Tuesday morning when CNBC’s Jim Cramer made some negative remarks on the company the night before. The recent entries into the car sharing space from car rental giants such as Hertz and Enterprise and the European car sharing company Car2Go have hurt investor confidence in Zipcar’s future. However, we believe that pessimism around the young company’s stock is overdone and that the stock is undervalued at its current market price. Below is our reasoning:

See our complete analysis for Zipcar’s stock

The Issue

After gradually recovering for a week, Zipcar’s stock had a bumpy ride on Tuesday morning as the stock plunged 9% in early trading before recovering the losses later in the day. Cramer’s comments highlighted the competition creeping up on Zipcar’s turf as rental giants such as Hertz, Enterprise and big automakers such as Daimler (Car2Go) have been aggressively expanding into the hourly car rental space. Car2Go is currently promoting its RFID loaded rent-by-minute service with the added attraction of one-way rentals while Hertz plans to make its 375K-strong fleet compatible for online reservations and hourly rentals by 2013. To makes things worse, almost all of these competitors charge lower memberhips fees than Zipcar.

Our Take

We believe the pessimism around the young company’s stock is overdone and the stock appears undervalued at $10. Zipcar’s revenues and memberships have both grown at 20%+ over the last few quarters and the company currently serves 700K members with a fleet of over 9K vehicles in North America and Europe. Although the entry of large players to the niche market may decelerate Zipcar’s growth, we believe there is still significant opportunity and room for Zipcar to continue growing at a decent pace.

With more than a half million members, Zipcar currently dominates the car sharing market in the U.S. Our current $18 price estimate assumes Zipcar Membership in North America reaches 1.4 million by 2018 signifying double digit sales growth. Under this scenario the company would still only have a 20% share of the 7.5 million total market membership forecast by a recent RAND report. If Zipcar manages to capture a market share above 20%, our current price estimate would appear conservative. The report also highlights that demand in the ‘maximum adoption case‘ may exceed 20 million users in the U.S., and if Zipcar manages even a 10% market share, it would mean a significant upside to our $18 price estimate.

Hertz and Enterprise Cannot Ignore Growing Popularity of Hourly Rentals

We believe that a bet on Zipcar is really a bet on the nature of future transportation. While the growing number of players has changed market dynamics, we believe the market still has significant growth potential. The entry of competitors only resonates the expectations of much higher demand for short-term rentals in the future.

The millennial generation drivers are increasingly becoming indifferent towards car ownership. Even though competitors are trying to win customers with their lower or no membership options and one-way rentals, we believe Zipcar still enjoys immense brand loyalty with its competent tech-savvy services and well-maintained fleet. The company has so far enjoyed very high membership retention rates. It is now trying to make its membership options more flexible by introducing monthly memberships in addition to its standard annual memberships. We believe the company will continue to adapt itself to changing demand patterns to maintain its leading market presence.

We have a $18 Trefis price estimate for Zipcar.

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