Friday, June 10, 2011

The $150,000 Mini Cooper

Zipcar has a market cap of 1.2 Billion at $29 a share.  It operates 8250 cars in 14 cities.  That works out to about $150,000 per car.  Where did all the money go?

We are headed for trouble, plain and simple.  And we saw the same thing the last time around - when the Real Estate market collapsed in 1989, and everyone wanted in on the "next big thing" to rebuild their shattered portfolios.

In the 1990's, IPOs went nuts, often selling for double their offer price the same day. went from spectacular IPO to bankrupt in less than a year.  What were we thinking?

Or more precisely, what are we thinking now?

Baby boomers, desperate to save enough to retire, are now "doubling down" their bets by trying to find "the next big thing" which will pull their portfolio out of the gutter.  They are squandering their few remaining dollars chasing a dream.  A dream that is about to go horribly wrong.

The Zipcar IPO is a case in point - the company operates 8250 cars in 14 cities.   You read that right - a fleet of cars probably smaller than what your local phone company has.  At its current market valuation, that works out to about $150,000 per car.

Why is the company worth this much?  The short answer is, it ain't.  The company has been losing money its entire life and really started losing a lot last year.  And the growth model is very limited, as I, and other analysts have pointed out.

And the traditional rental car companies - with their huge fleets of cars - are starting to invade Zipcar's space.  If there is any money to be made in hourly car rental, the big car rental companies will tap into it, diluting Zipcar's profits in its best markets.

I am not singling Zipcar for particular abuse - it is only emblematic of the problem.  Other recent IPOs, including LinkedIn, are similarly overvalued.  Groupon is doing an IPO and has similar problems to ZipCar - losing money and no real unique business model that hasn't been copied ad infinitium.  And of course, everyone is waiting with baited breath for the fabled Facebook IPO - another company that has yet to make dollar one or any serious plan to.

What does this mean to you and me, the chump investor?  Well, we say to ourselves, "Glad I am smarter than to invest in that crap!" - but we are deluding ourselves.

First, if you invest in a mutual fund, chances are, you may be investing in crap like this.  If you have a fund that is a high-tech sector, you may end up with Zipcar, LinkedIn, Groupon, and Facebook stocks on your balance sheet.  And when the bubble bursts, your portfolio will go South in a hurry.

Second, even if you invest in "blue chip stocks" your portfolio may be brought down by a general decline in the market - as happened in 2009.  Even the best stocks tanked in February 2009, and we all wish we had cash to go back then and buy them (like Avis, which has climbed 2600% in the two years since then!).

The problem is, trying to time the market.  It seems only logical and rational that the stock prices of Zipcar will adjust themselves - if the company doesn't eventually go bankrupt. You cannot stay in business without making a profit, and so far, Zipcar doesn't seem to show signs of that.  Even if they do show a profit, as one of the articles above notes, they would have to expand their business base by a factor of five to justify the current stock price.  In other words, the price of Zipcar stock has only one direction to go in - and that is down.

Groupon also is losing money - and losing market share to living social and other "me too!" competitors.  A cute concept, perhaps a fad.  But there is no compelling reason to use one "Daily Deal" site over another, particularly since they all use saturation advertisement.

Of course, back in 1995, wild-eyed and impossibly young "entrepreneurs" from start-up companies tried to convince me that "profits were a thing of the past!" and that the Internet was so different that traditional business models didn't apply.  Go sell crazy somewhere else.

The problem with that kind of happy-talk is that you can't pay your employees and the light bills with dot com stock.  Eventually, there has to be some cash coming in - a profit.  And as the people realized, without a profit, you have to shut your doors.

Of course, one might argue that these companies are all a big con - and that this sort of con has been going on for a long time - Centuries, even.  Back in the late 1800's, we saw a boom in railroad construction, and then a bust.  Railroads were being built everywhere, and some tiny branch lines were commanding astronomical prices on the stock market.  Investors from overseas, particularly England, got sucked into the excitement of "investing" in this "new frontier".

In a way, the railroads were the Internet of its day - a means of communication and commerce between outlying regions.  The problem wasn't that these railroads were unprofitable, but that the valuations ascribed to them were far over any possible profits.  And as more railroads were built, they started to compete with each other and steal each others business - the result being, like with Groupon, that no one person could control prices.

And of course, many tiny branch lines had such sparse populations to serve that there was no way they could pay back their investment - ever.  And many of those lines went bankrupt and were abandoned.

And of course, some wily people on Wall Street made a lot of money convincing people that the Railroads were the "next big thing!" and that they should get in on the ground floor, before it was too late.  Sound familiar?

And it ain't a crime, either.  All perfectly legal.  You can fleece people for Millions of dollars back then - Billions today - and never see the inside of a jail cell.

But again, what does this mean for you and me, the chump investor?  There are really only two alternatives, both repugnant.

1.  You can put all your money in a mattress - or a government insured savings vehicle (both earn about the same amount of interest).  This is a "safe" investment, but it doesn't grow even with the rate of inflation and certainly isn't going to earn you any money.

2.  You can try to time the market and anticipate when it will all go horribly wrong:  Like in one article above, a fellow is short-selling Zipcar stock.   A good move - the stock will collapse - but WHEN?  That is the key.  I though the Real Estate market would collapse in 2005 or so - but it went on, like a Zombie, for nearly four more years.  Timing, as they say, is everything, and trying to time the market is very, very difficult.

There is, of course, another alternative.  You can diversify your investments to include a number of things - stocks, bonds, insurance, real estate, annuities, savings accounts, CDs, - whatever.   If one goes South, maybe some of the others will do OK.   And avoid jumping on bandwagons as they roll into town, particularly, as in the case of Zipcar, Facebook, Groupon, and the like, where the company is making no money and has no real plans to.  Just because something is popular doesn't mean it is profitable!

If history is any guide, the dot com euphoria will dry up by about 2015 or so.

Note:  At the beginning of this piece, I noted "Where did all the money go?" which was me being a bit tongue in cheek.  As I noted in the past, "Market Cap" doesn't represent how much money the company receives in an IPO, just the latest stock price times the number of shares.  Zipcar received far less than the market cap.  Nevertheless, the valuation of the company is very high in relationship to its assets.  In a nation of 330 MILLION CARS, running a fleet of 8250 is really no big feat.

And therein lies the problem with Zipcar.  Cars are cheap - dirt cheap - and the main cost of ownership in the big city is in parking them.  For a Manhattanite, the idea of not having to deal with the hassle is attractive.   For about 90% of the population - perhaps as high as 99% - the "hassle" of owning a car is only outweighed by the hassle of not owning one.

My Hippie brother lived in Manhattan for a decade and kept a car there - on the street - without much difficulty.  Zipcar is a convenience thing, not an economic model.

UPDATE:  Zipcar stock skyrocketed for a while, and then tanked.   AVIS bought the company for about 2/3 the IPO price and less than half the price many paid the first day of the IPO.   How is ZipCar doing?  Have you read about it lately?   Have you seen a ZipCar around?  A lot of the hype about ZipCar was just that - hype planted by the people selling the stock that this was "the wave of the future".   Funny thing, though, one of the largest traditional rental car companies bought it out for pocket change.