Not everyone gets the chance to get behind the wheel of a Ferrari in their lifetime, let alone own one, but anyone with an investment account can buy shares in the legendary supercar maker, which is also all the rage for its Comparison with the Renault Twingo in Shakira’s last song with Bizarrap. Is it a good time to take a walk in the markets with this company?
With a promising near-term outlook followed by the upcoming transition to electric vehicles that should increase sales volumes, Ferrari shares appear poised to shift into higher gear in 2023, some experts say. Tom Narayan, an analyst at RBC Capital Markets, expects the group’s revenue to nearly double this year and triple by 2030.
Driving a Ferrari is not like driving a Twingo, as the song says, just as buying shares in the Italian company is not like buying shares in a car manufacturer like Renault that sells mostly on the retail market: it requires investors to put up with a strong valuation premium compared to other competitors.
“You don’t buy a Ferrari just to get from A to B,” says Brian Lum, a portfolio manager at UK-based Baillie Gifford, which owns 5% of Ferrari shares. “This is not a car company, it is a luxury company that makes cars”, he delves into his analysis.
This translates into wider profit margins, less cyclicality and faster growth than retail automakers, supporting a higher valuation multiple. Bulls argue that Ferrari shares should trade more like LVMH, Kering, Richemont or Hermès International than General Motors, Toyota or Volkswagen.
Like luxury clothing makers or watchmakers, Ferrari intentionally produces less relative to demand to drive scarcity and price up a notch. The company’s gross profit margin exceeds 50%, versus 20% or less at GM and others. Waiting lists for the Italian company’s new models are long, making sales more consistent than at general-market automakers, much more sensitive to the vagaries of cycles in the global economy.
Just like a Birkin bag or a Rolex, to keep with the fashion theme, limited-edition Ferraris tend to increase in value over time. And brand loyalty is high: the company says more than 40% of its car owners own more than one. Wealthy customers and more demand than supply give the group pricing power, isolating the benefits of inflation and the negative impact of a recession.
Bernard Arnault’s LVMH trades roughly 24 times future earnings, Kering, parent of Gucci and Saint Laurent, 16 times, Richemont, owner of Cartier, 20 times and Hermès 47 times. At a recent price of 221 euros per share, Ferrari shares are at 36 times next year’s earnings, having reached 30 and 50 times over the past year and a half. Most automakers, except Tesla, are trading on multiple single-digit earnings forecasts.
Ferrari is trading for less than Hermès and LVMH and with slight premiums to Richemont and Kering.
The big exclusive release
That expected growth comes from several new model launches planned for the next few years, fueled by gasoline, hybrid and all-electric engines, and continued price increases. Ferrari’s first sport utility vehicle, the Purosangue, is expected to hit the market in 2023.
The Purosangue isn’t a Chevy Suburban, it’s more like a slightly taller sports car with four seats, four doors, and a greatly reduced trunk capacity. It will feature a 725 horsepower V-12 engine that can propel a family from 0 to 100 kilometers per hour in just 3.3 seconds.
Unlike rivals such as Volkswagen-owned Lamborghini, which said its Urus SUV saw demand for about 5,000 of the 8,500 units it sold in 2021, Ferrari has vowed to limit production of the Purosangue to 20% of annual production to continue its exclusivity strategy and maintain the brand image.
The Purosangue reportedly sells out in just a few weeks in the fall, with deliveries not starting until the middle of this year. Ferrari’s Maranello plant in Italy has a capacity of up to 15,000 vehicles a year, suggesting no more than 3,000 SUVs will be sold a year. That could still make it one of the brand’s most popular models, alongside the €260,000 F8 Tributo and the €225,000 Roma. But the Purosangue will have a starting price of 421,000 euros.
Also helping to boost media sales prices in 2023 is the limited-edition Daytona SP3, which costs more than €2 million. Ferrari could deliver around 150 of those 840-horsepower beasts in this exercise. Thanks to Ferrari’s order book, growth in 2023 is guaranteed. The analyst consensus forecasts a 22% increase in earnings per share this year, to $6.11, on revenue of 5.6 billion euros, up 11%.
