Value Line is initiating coverage of zipcar (ZIP) in The Value Line Investment Survey. The company’s initial public offering was held in late April, 2011. The company was among the first to offer a car sharing service that allows its members to somewhat spontaneously rent a car for just short periods of time, often as little as an hour, without the hassle of the normal car rental process. As of June 30, 2011, zipcar had over 9,400 vehicles (3,684 owned, the rest leased) available to its over 600,000 members across 15 major metropolitan areas and on over 230 college campuses in the United States, Canada and the United Kingdom.

At the core of zipcar’s service is its website, which handles virtually all of the company’s transactions. The software behind the website that manages the fleet is proprietary and costly to build and maintain. However, it handles the task of matching members with available cars—essentially the core of zipcar’s business. In an attempt to monetize this asset to the fullest degree, management has begun to allow others to use the software for their own services, using the software as a service (SaaS) methodology that has been popular of late. It calls this product FastFleet. The revenue derived from FastFleet is not broken out in the financial statements and is immaterial at present to the company’s ongoing results; however, it presents an opportunity for zipcar to benefit from supporting the operations of competitors.

The company focuses its operations in metropolitan areas and universities/colleges that it believes are large enough to support a car sharing service. The bulk of its members are located in Boston, New York, Washington, D.C., London (the result of a recent acquisition), and the San Francisco Bay area. The primary sources of zipcar’s revenues are vehicle usage and membership fees.

Prospective members apply for membership online and pay a one-time non-refundable application fee. Membership is granted after a satisfactory review of the applicant’s driving record and the validation of credit card information. Virtually all of the company’s transactions are handled via credit card. The application fee is recognized over a five-year period (management’s estimate of the average life the member relationship). Annual membership fees are recognized over a 12-month period. Vehicle usage revenue is recognized as chargeable hours are incurred.

Fleet expenses are, by far, zipcar’s largest cost, representing just over 65% of the company’s costs in the second quarter of 2011. The cost of this fleet is in many ways static and creates a high hurdle for achieving profitability. That said, revenue beyond the stranded costs associated with the fleet will largely flow to the bottom line.

The fleet expenses include not only the cost of the vehicles and their maintenance, but also the cost of gasoline and automobile insurance, which members do not have to pay. Although this is a benefit to its members, and very different from the model employed by traditional car rental outlets, these costs can be highly variable. As a commodity, the price of gasoline can change both rapidly and dramatically. That said, the price movements of gas can aid results, as well as hurt.

Insurance costs, meanwhile, are less likely to aid results. Indeed, the company must contract with insurance companies for this product. To some extent, the driving results of its members, who may not take the same care with “someone else’s” car as they would with their own, will dictate the rates the company must pay for coverage. Moreover, by allowing others to use its vehicles, it may share liability for any material accidents not covered fully by its insurance providers.

Although zipcar has material brand recognition in its markets and the costs of setting up a material competitor are steep, smaller players are cropping up and a number of well-heeled car rental companies have begun offering or exploring the business as a platform for their own expansion (Hertz’ (HTZ) “Hertz on Demand” service, for example). This could be a material impediment for zipcar, which has yet to turn a profit as it has been focused on expansion. These competitors have material vehicle fleets and operations that reach well beyond a small collection of major cities.

FastFleet could, to some degree, help zipcar better handle competition, as it allows the company to benefit from smaller competitors entering the market. Although there is no indication at this point that this would happen, if Fastfleet were to be used by a large competitor, it would be even more beneficial—similar in nature to the way Amazon.com (AMZN) has benefited by supporting Web sites for smaller retailers and many large online retailers. The company’s division focused on corporate and government operations could also prove beneficial in staving off competition if it can gain a material presence in these markets before others step in.

The company believes that there are about 100 cities and hundreds of additional universities that can support a car sharing service, suggesting plenty of room for expansion. To date, the company has grown both organically and via acquisition, such as the recent purchase of Streetcar Limited in The United Kingdom. Either route, however, is likely to require material upfront costs. Funding this growth could become problematic if the company is unable to get financing or issue additional shares.

Subscribers interested in keeping tabs on zipcar’s growth efforts should consult Value Line’s quarterly reviews in The Value Line Investment Survey, keeping an eye out for Supplementary reports highlighting material events that occur between regular coverage intervals.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.