Ferrari Is Shifting Into High Gear. Buy Its Stock.
Not everyone has a chance to get behind the wheel of a Ferrari in their lifetime, let alone own one, but anybody with a brokerage account can buy shares in the storied supercar maker. Now is a good time to take a ride.
With a promising near-term outlook followed by a coming transition to electric vehicles that should juice sales volumes, Ferrari shares (ticker: RACE) appear set to shift into higher gear in 2023.
RBC Capital Markets analyst Tom Narayan sees revenue almost doubling for Ferrari, and a key earnings measure nearly tripling by 2030.
Driving a Ferrari isn’t like driving a Chevrolet, and buying Ferrari stock isn’t like buying shares of a mass-market auto maker—it requires investors to stomach a steep valuation premium to other auto makers.
“One doesn’t buy a Ferrari just to go from A to B,” says Brian Lum, a portfolio manager at Baillie Gifford, which owns 5% of Ferrari shares. “This isn’t a car company, this is a luxury company that happens to make cars.”
It means wider profit margins, less cyclicality, and faster growth than mass-market auto makers—which supports a higher valuation multiple. The bulls argue that Ferrari stock should trade more like LVMH Moët Hennessy Louis Vuitton (MC.France), Kering (KER.France), Richemont (CFR.Switzerland), or Hermès International (RMS.France) than General Motors (GM) , Toyota Motor (TM), or Volkswagen (VOW3.Germany).
Like the makers of luxury clothing or watchmakers, Ferrari intentionally underproduces relative to demand to drive scarcity and price at a premium. The company’s gross profit margin exceeds 50%, versus 20% or less at GM and others. Waiting lists for new Ferrari models are long, making sales more consistent than at mass-market auto makers sensitive to the vagaries of the global economy.
Like a Birkin bag or a Patek Philippe timepiece, limited-edition Ferraris tend to appreciate in value over time. And brand loyalty is high—the company says that more than 40% of Ferrari owners own more than one. Deep-pocketed customers and more demand than supply gives Ferrari pricing power, insulating earnings from inflation and the negative impact of a recession.
Bernard Arnault’s LVMH goes for about 24 times forward earnings, Gucci and Saint Laurent parent Kering trades for 16 times, Cartier owner Richemont for 20 times, and Hermès for 47 times. At a recent 221 euros ($239), the Milan-listed Ferrari shares were at 36 times the coming year’s consensus earnings, having traded between roughly 30 times and 50 times over the past year and a half. Most auto makers— Tesla (TSLA) excepted—trade for mid-single-digit multiples of earnings forecasts.
Adjusted for expected long-term growth—the stock’s multiple divided by annual growth in earnings before interest and taxes, or Ebit, through 2030—Ferrari trades for less than Hermès and LVMH and at slight premiums to Richemont and Kering.
That expected growth comes from several new model launches planned for the coming years, powered by gas, hybrid, and all-electric drivetrains, and continued price increases. Ferrari’s first sport-utility vehicle, the Purosangue, is expected to hit the market in 2023.
The Purosangue is hardly a Chevy Suburban—it’s more like a slightly taller sports car with four seats, four doors, and a trunk capacity of only 17 cubic feet. It will pack a 725-horsepower V-12 engine that can propel a happy family from 0 to 60 miles an hour in 3.3 seconds.
Unlike rivals such as Lamborghini, which said that its Urus SUV made up some 5,000 of the 8,500 units it sold in 2021, Ferrari has promised to cap output of the Purosangue at 20% of annual production to maintain exclusivity and keep the brand image.
The Purosangue reportedly sold out in weeks in the fall, with deliveries not beginning until around the middle of this year. Ferrari’s plant in Maranello, Italy, has a capacity of up to 15,000 vehicles a year, suggesting no more than 3,000 SUVs will be sold annually. That could still make it one of Ferrari’s most popular models, alongside the $260,000 F8 Tributo and $225,000 Roma. But the Purosangue, Italian for “thoroughbred,” will start at $421,000.
Also helping to boost average sales prices in 2023 will be the limited-edition Daytona SP3, which goes for more than $2 million. Ferrari could deliver about 150 of those 840-horsepower beasts this year.
Thanks to Ferrari’s order book, 2023’s growth is pretty much guaranteed. Analyst consensus calls for a 22% increase in earnings per share this year, to €6.11, on revenue of €5.6 billion, which would be up 11%.
Beyond 2023, there’s the transition to electric vehicles—an impetus for change where Ferrari does resemble other auto makers. It is building a new production line in Maranello specifically for EVs and is targeting deliveries of its first fully electric model in 2025. As with the Purosangue, those will be greatly anticipated, supporting further price increases.
Narayan’s model has Ferrari delivering 20,000 cars in 2030, up from about 13,000 in 2022. Management is targeting a lineup of 20% internal combustion engine, 40% hybrid, and 40% all-electric vehicles in 2030.
By then, Narayan expects revenue to almost double to 8.8 billion euros, and for Ebit to reach €3.3 billion, up from €1.2 billion last year. He rates Ferrari stock at the equivalent of Buy, with a price target of €265 on the Milan-listed shares—roughly 20% upside.
“You have this double whammy of pricing power in addition to volumes,” he says. “That’s why the growth story here is really, really compelling.”