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Zipcar Inc. is used to cult-like devotion from its customers. Now the newly public company is enjoying a similar love-in with investors – despite financial numbers that require a leap of faith.

The car-sharing pioneer was the darling of Wall Street last week, when its initial public offering went ten times oversubscribed, sending the stock through the stratosphere in its Nasdaq debut. Priced at $18 (U.S.) a share – already well above the $14 to $16 that analysts had anticipated – the stock surged to $30 on its opening trade and quickly peaked at $31.50, before settling back to $28 at the close of its first day. (The stock lost 79 cents to $26.37 Monday, in a day of widespread losses on global equity markets.)

All this for a company with an unorthodox short-term car-rental business that despite 560,000 customer-members in 14 major cities (including Toronto and Vancouver) and more than 230 university campuses has never turned a profit in its 11 years in business. Last year, despite expansion and a major British acquisition that helped boost revenues by 42 per cent to $186-million, the Cambridge, Mass. company posted a loss of $14.1-million – equivalent to 49 cents a share, according to its IPO prospectus.

"It's a cult IPO," said Scott Sweet, senior managing partner at Florida-based IPO research firm IPO Boutique. "A cult IPO is one where people like it so much that they say, 'I want it at any price.' "

Zipcar cautioned in its prospectus that it expects to lose money again in 2011, adding, "We do not know if our business operations will become profitable or if we will continue to incur net losses in 2012 and beyond."

Then there's the matter of debt – no small issue for a company whose growth requires up-front investment in fleets of vehicles and expensive downtown real estate on which to park them. The company had debts totalling about $95-million at the end of 2010 – although part of the IPO proceeds will be used to reduce that overhang.

Analysts said what's got investors so excited is an attractive business model that Zipcar could roll out to many more urban centres than it currently services.

The business offers member-customers the ability to rent vehicles by the hour – for as little as $7 an hour – with gas and insurance included. Customers can reserve cars over the Internet or smart phone and pick them up at local parking lots, using a pass card to get access to the vehicle.

IPO analyst Francis Gaskins of IPO Desktop said Zipcar has identified more than 100 major urban centres globally, as well as hundreds of campuses, as potential markets.

"Zipcar has an impressive track record of top-line growth and targets a large and growing market opportunity in the car-sharing space," wrote IPO research firm Renaissance Capital. "The company has posted two consecutive years of positive cash flow, and while it is investing aggressively in growth, its returns should scale nicely as increased membership drives higher vehicle utilization."

But Mr. Gaskins worries that Zipcar's current business structure offers "little room for bottom-line profits," and expressed concern about the company's high ratio of operating expenses to revenues.

At its current price, Zipcar is trading at a premium to other car-rental companies on both a price-to-book and price-to-sales basis. And it's those other car-rental companies that may present the biggest threat to Zipcar justifying those premiums.

IPO Boutique's Mr. Sweet noted that Hertz Global Holdings is already conducting a small-scale pilot of its own car-sharing program, and if it decided to get into the business on a large scale, it "could undercut Zipcar's price by half."

"[Zipcar]has no room in its income statement for price competition, because operating expenses are so high," Mr. Gaskins wrote.

And Mr. Sweet said that given the big vote of confidence investors have given Zipcar right out of the gate, the company is going to have to deliver on its promise or face a fall from market grace.

"Do I think it will stay at $26? If they ever miss their numbers, absolutely not," he said. "If they mess up, the stock is going to get hammered."


Zipcar membership: more than 560,000

Number of vehicles in fleet: more than 8,000

Size of North American car-sharing market, 2009: $253-million (U.S.)

Size of European car-sharing market, 2009: €220-million ($313-million)

Forecast size of North American car-sharing market, 2016: $3.3-billion

Forecast size of European car-sharing market, 2016: €2.6-billion

Sources: Zipcar Inc., Frost & Sullivan, Bloomberg