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Zipcar (NASDAQ: ZIP) has posted strong rallies this month, driven largely by more optimistic analyst ratings, which suggest that the long-term prospects for the company might be improving. The company is known mostly for its creative approach to the rental car industry, renting cars by the day or by the hour and the company is now trading at its highest levels in six weeks. This optimism is something of a surprise for many, given that the company lost half of the market value that was seen at the beginning of the year.
But has this downturn reached an end? Is Zipcar now a standout stock for investors looking to gain exposure to emerging growth companies? When looking at the latest analyst revisions for Zipcar’s market valuation, significant changes can be seen in investment banks like Goldman Sachs (NYSE: GS), which upgraded Zipcar shares to a “buy” and suggested that the company is likely to see potential returns of nearly 25% from its current values. And, given that the company’s current price is more than 40% below its yearly highs, Zipcar could just represent one of the best buying opportunities in the industry as we move into 2013.
So what are the reasons for analyst optimism in Zipcar? First, while the company is free cash flow negative, it should be remembered that this is only the case because the company is reinvesting all of its money back into the high growth business (think Home Depot (NYSE: HD) in the mid 1980s). In addition to this, Zipcar has the largest installed user base, the best parking spaces, and improved technology (relative to its main competitors - ie. Hertz Global Holdings (NYSE: HTZ). And all of these factors are combined into a quality brand.
Thus far, Zipcar has posted 25% revenue growth in existing mature markets and the company has shown a strong willingness to move into international markets as well. With the expectation that the company will command higher operating margins in all of these markets, it is not totally surprising that we are beginning to see upward revisions to analyst expectations for potential returns. With this increased attention in the financial media, it would also be relatively unsurprising to see larger travel companies such as Priceline.com (NASDAQ: PCLN) discuss a potential Zipcar acquisition in the future.
Resilience in the Zipcar model has been seen since the company reduced its guidance earlier this summer and while the price of the stock has not shown much of a recovery (relative to its all time highs), it is clear that Zipcar has not fallen victim to potential competition from larger competitors. Since there are few comparable alternatives to Zipcar (and none with the same brand recognition) the company is likely to continue to branch into different geographic and demographic markets.
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