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Steven Syre | Boston Capital

It could be bumpy ride

By Steven Syre
Globe Columnist / April 15, 2011

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I’d rather drive a Zipcar than own the stock.

The popularity of Zipcar Inc.’s basic business idea — placing cars in convenient spots so city drivers can borrow them for hours or days — is clear as a bell. The company’s customer base has swelled to more than 540,000 members — known as Zipsters (rhymes with hipsters). Zipcar’s revenues are growing through the roof.

But that doesn’t make Zipcar a great business or a compelling stock. In fact, I doubt it will turn out to be either. Zipcar may become one of those ventures that does a lot more for its customers than for its owners. At the moment, it’s a wildly hyped investment opportunity.

Zipcar is generating excitement because it looks like one of those cutting-edge companies that uses technology to turn a mature industry inside out. Zipcar’s board includes high-profile venture capitalists and other boldface names from the tech world such as America Online pioneer Steve Case and former eBay Inc. chief Meg Whitman — just the kind of people who could pull off that kind of strategy.

Unfortunately, Zipcar has to deal with some expensive mature-industry problems. For one, fleets of cars and other overhead make it difficult for Zipcar to ramp up profitability as business increases. Another: Competition from other companies with deep pockets is growing and will remain a relentless, long-term challenge.

Zipcar benefits from the same urban-chic image that helped OpenTable Inc., the online restaurant reservation company, go public in 2009. OpenTable, which was profitable before it went public, is the kind of company that can boost earnings dramatically as business grows. Revenue jumped 44 percent but profit nearly tripled in 2010, its first full year as a public company. Initially priced at $20, OpenTable shares closed yesterday at $104.74.

Zipcar hasn’t demonstrated that kind of scalability — increasing business at relatively modest additional cost, to turbocharge profits. In fact, Zipcar has had only a passing experience with profitability over its 10-year life (it pulled off an operating profit in the last quarter of 2009).

As business grew, Zipcar remained in the red. The company lost $4.4 million on revenue of $30.7 million in 2006. Four years later, Zipcar’s revenues stood at $186.1 million but the company lost $14.1 million. How did that happen? Expenses grew as fast — or faster — than the company’s business. While revenues increased about six fold between 2006 and 2010, so did Zipcar’s biggest expense, the cost of fleet operations.

Fast-growing companies like Zipcar have a stock answer to questions about persistent losses. All the company’s energy and resources are being dedicated to growth. If it wanted to be profitable, it could start tomorrow simply by putting the brakes on that growth. This is precisely what Zipcar executives told investors during road shows leading up the company’s IPO.

There’s always an element of truth to that explanation. Perhaps Zipcar could make money. But how much and how fast?

Price pressure will become a bigger business problem soon for Zipcar. Competition from large car rental companies is growing. Rental companies seem to operate in a perpetual price war. It will never go away.

Zipcar is the flashiest IPO to come out of Massachusetts since A123 Systems, the Cambridge battery company, went public in 2009. A123 shares went off at $13.50 and quickly soared to over $25. They closed yesterday at $5.54. A123 had an interesting long-term strategy but very little actual business. Investors soon lost enthusiasm.

Zipcar tells an interesting story and operates a very real business, lending cars to members in Boston and many other cities every day. But I doubt that business will be able to live up to the huge expectations that come with a white-hot stock.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.