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Zipcar shares off to a roaring start

Analysts skeptical about long-haul performance

Zipcar has more than 8,000 cars and 560,000 members in three countries. But despite its rapid growth, the Cambridge company hasn’t made a profit since it was founded in 2000. Zipcar has more than 8,000 cars and 560,000 members in three countries. But despite its rapid growth, the Cambridge company hasn’t made a profit since it was founded in 2000. (David Kamerman/Globe Staff/File 2000)
By Katie Johnston Chase
Globe Staff / April 15, 2011

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Shares of Zipcar Inc. soared 56 percent on its first day of trading yesterday — one of the best IPO showings this year — but analysts are not sold on the Cambridge on-demand car service that has not turned a profit since it was founded in 2000.

Zipcar, which rents cars by the day and the hour, raised $174.3 million in its initial public offering, about 30 percent more than it initially sought. The company priced the shares at $18 each, several dollars higher than the $14 to $16 price it initially filed. Shares closed at $28, up $10 on the Nasdaq exchange.

“This is a pinch-me moment,’’ said Scott Griffith, chief executive of Zipcar. “This is a category whose time has really come from.’’

Some analysts are skeptical about Zipcar’s business model, however.

Zipcar usage fees are a fraction of the cost of car insurance, parking, depreciation, and maintenance for urban residents, according to a note issued by the investment research firm Morningstar Inc. earlier this week, and seem to be too good a deal for Zipcar to realize any meaningful economic returns.

The interest in Zipcar is partly due to a supercharged IPO market, said Bill Buhr, an IPO strategist at Morningstar. “Those investors to me are taking a leap of faith in the business model,’’ he said. “It’s certainly not what I would call a safe play.’’

“Car-sharing’’ is a $350 million industry in the United States, with more than 500,000 members, and is expected to grow to nearly $3 billion and 4 million members in the next five years, according to the global growth consulting firm Frost & Sullivan. In Boston, three companies have entered the market in the past year.

Zipcar, which has more than 8,000 cars and 560,000 members in the United States, Canada, and the United Kingdom, has been growing rapidly, with membership more than doubling since 2008 and revenues increasing 42 percent from 2009 to 2010. It bought competitors Flexcar in 2007 and London’s Streetcar Limited last year and plans to enter two or three cities a year, focusing mainly on the international market.

But expense of buying and maintaining cars has kept the business from being a big money maker. Zipcar controls an estimated three-quarters of the North American on-demand rental market but has not yet been profitable and expects losses again this year.

“The majority of our markets are now making money, and we’re taking those profits and investing them into growth,’’ said Zipcar chief Griffith. The company plans to use the money raised in the IPO to pay down its debt and expand into new markets.

The company is expecting even more growth. Because Zipcar customers do not pay for gas, interest peaks when gas prices are high — as they are now, Griffith said. When prices hit $4 a gallon in early 2008, for instance, Zipcar added a record number of new members.

But those high prices also mean the company is paying more to fill up its cars. Zipcar raised its prices about 25 to 50 cents an hour in 2008 to cover the cost, and Griffith anticipates raising them again by that amount to make up for skyrocketing prices at the pump.

Competition also could be a significant threat to Zipcar, according to analysts at investment advisory firm Renaissance Capital, especially from big car rental companies such as Hertz Corp., Enterprise Rent-A-Car, and U-Haul International Inc., which have started offering by-the-hour rentals. These services could also be hit with the tax levied on traditional rental cars.

In the end, though, the biggest worry for Zipcar is that it has not found a way to make money, said Andrew White, an investment analyst with the asset management firm Anlyan & Hively.

“That, in essence, is the fundamentals of the business,’’ he said. “It’s got to create positive cash flow.’’

Katie Johnston Chase can be reached at johnstonchase@globe.com.