Ferrari N.V. (NYSE:RACE) is a luxury automotive manufacturer based in Maranello, Italy. The company is synonymous with high-performance sports cars. Ferrari shares have been on a strong upward trend in recent years, with a slight bump in the road in 2022 as interest rates soared. In 2023 alone, shares are up over 43%.
How are the fundamentals?
The first thing investors in Ferrari need to understand is that it is a premium company. With only 15,000 cars expected to be sold in 2023, exclusivity is a core part of the business. This means that despite a high valuation, investors still flock to own the company.
Let’s start with the fundamentals of the company. Ferrari generated €5.5bn in revenue in 2022, and its earnings per share (EPS) was €5.93. With a solid profit margin of 19.5% and manageable debts, the company is in great shape. Net income has grown an impressive 33% in the last year as sponsorships soared.
At a glance, a discounted cash flow of Ferrari shares put fair value of the stock at $40.49, considerably below the current price of $307.53. Compared to other vehicle makers such as General Motors or Ford, with price-to-earnings (P/E) ratios of 4.4 times and 11.4 times, respectively, Ferrari’s P/E of 44.7 is high.
Is there potential for more growth?
The exclusivity and desirability elements of the luxury market are difficult to quantify. However, the concept of owning a Ferrari is synonymous with success, meaning that the demand is likely to remain high for the foreseeable future.
The company holds global prestige, and is expanding into new markets, such as China and the US. The company is also developing new products, with the first electric Ferrari, expected in 2025.
Risks
It is vital that Ferrari maintains its desirability and premium brand. Every single Ferrari that goes on sale continues to sell out, but if this were to change, the company could quickly find itself in a dangerous spot. With a valuation so high, Ferrari cannot afford to be seen as ‘just another car company’. The company has a strong brand and a loyal customer base, but poor performance in Formula One competition in recent years is a sign that the brand quality may be slipping.
The company clearly caters to a consumer with expensive tastes, but nobody is entirely immune to economic pain. If a recession were to hit, it would not be a surprise to see demand in luxury supercars declining. Increasing competition, as well as the rapid transition to electric vehicles, may also put the brakes on growth, especially if the internal combustion engine fades in relevance.
Am I buying Ferrari shares?
Ferrari is a special company. Not many global brands have the ability to set prices with full confidence that the product will be snapped up in seconds. With an order book full for the coming years, and an electric car on the way, I believe the future looks good. Despite the valuation being extremely high, the prestige of the brand puts it in a class of its own. If the business can continue to execute well, and maintain this desirability, I have faith that the company will continue to grow. I will be buying Ferrari shares at the next opportunity.
