Ferrari NV (RACE, Financial) is likely the highest-margin luxury automobile company on the planet. Its product and service set commands high prices due to customer loyalty, purchases based on prestige and a highly specialized and customizable approach.
However, my analysis has revealed the shares cannot be considered a value investment. That being said, the company's incredible growth and profitability scores elucidated by GuruFocus data have given me reason to be confident in the long-term outlook of my Ferrari holdings.
Operations
Ferrari has a diverse portfolio, including automobile sales, customization, engine and component sales, sponsorships, licensing and merchandising, maintenance and repair, leasing and financing, limited edition and special models and other more niche revenue sources.
According to Auto User Guide, some of the best-selling Ferrari models in the U.S. in 2023 included the SF90 Stradale, Daytona SP3, 812 GTS, 296 GTB, Roma and Portofino. The Ferrari 250 GTO could be claimed to be the most successful and iconic Ferrari model ever. It is known for its racing success, rarity and value as only 36 units were ever produced between 1962 and 1964.
Crucially, Ferrari is steering clear of self-driving technologies facilitated by artificial intelligence. The reason for this is the company wants to retain its brand identity as a home for elite driving experiences. However, according to Reuters, it is planning to launch 15 new electric vehicle models between 2023 and 2026. The aim is for 80% of its sales to come from hybrid and electric models by 2030. This is being enabled by a 4.4 billion euros ($4.8 billion) investment in the EV segment by 2026.
Ferrari's first electric model is scheduled for 2025. The projection is for 40% of its car sales to be fully electric by 2030. Interestingly, hybrid models are projected to reach a 55% sales share in 2025 and then dip back to 40% in 2030. This is arguably due to the moving away from hybrid vehicles to fully electric over time.
The company's powerful electric stance is fortified by an in-house development scheme, with a new plant being established in Maranello, Italy for electric motors, inverters and battery modules. However, Ferrari will still outsource non-core components.
These advancements share territory with the likes of other car manufacturers pivoting toward EVs, but differ starkly from the heavy AI focus of companies like Tesla Inc. (TSLA, Financial). It seems to be a prudent move to not compete in areas of ill-expertise, instead focusing on bolstering the innate strengths of an already very strong and historic luxury brand.
Margins
The most obvious strength of Ferrari from a financial perspective is its industry-leading margins, which are well above other car manufacturers. The current gross margin is 49.39%, and the operating margin is 26.77%. GuruFocus' data shows the company's gross margin is ranked better than 95% of 1,261 companies in the Vehicles & Parts industry. The same data shows the company's operating margin is ranked better than 98.12% of companies in the vehicles and parts industry.
Ferrari's exceptionally high margins can be attributed to several factors. The company has built a reputation and ability to sell based on brand desire and prestige. The emotions related to status powerfully influence luxury spending and contribute to its revenue. Similarly, the company's focus on high-value products targeted to an elite demographic presents higher margins than are found in mass-market vehicles like the ones made by Toyota (TM, Financial). For reference, Toyota has a gross margin of 19.15% and an operating margin of 10%.
The company's net margin is 20.27%, which presents a 5.5% reduction from its operating margin. This is the result of 22.76% pretax income after -1.14% net interest income and -0.58% of other income expenses. A tax provision of -4.55% and -0.15% from minority interests also further reduced the operating margin to the net margin figure. The overall interest and other expenses are notably mild with the tax charge being the biggest contributing factor—a good sign from a balance sheet perspective.
Valuation
From a discounted cash flow perspective, the stock is currently grossly overvalued. GuruFocus outlines this powerfully on its DCF valuation scale. I have used earnings per share without non-recurring items as proposed by GuruFocus as the growth rates seem to correlate with a more stable, long-term forecast.
When using a 16.3% 10-year average growth rate followed by a 10-year 4% terminal stage and an 11% discount rate, the stock has a margin of safety of -117.14%. That is due to an estimated fair value of around $170 and a current stock price of around $370.
The discounted cash flow reading is a serious risk to contend with. It is also further supported by an unpalatable price-earnings ratio of around 52, which is worse than 85.74% of companies in the vehicles and parts industry. Unfortunately, what I deduce from these traditional valuation measures is that while Ferrari excels in profitability, its greatest defect is its valuation. That is often expected with high-growth stocks, but the situation is not the same with luxury powerhouse LVMH Moet Hennessy Louis Vuitton SE (XPAR:MC, Financial), which I analyzed previously and found a decent valuation with high levels of acquisitions and revenue growth.
It is evident that my valuation discussion on Ferrari was leading in this direction, but it is important to note the price-to-tangible-book value is around 90 for the company. This suggests that when investing in the stock, looking for intrinsic asset values as a deep value play is not a wise move. Instead, I am comfortable trading off Ferrari's massive luxury margins and significant 10-year 7.70% average annual revenue growth rate and one-year 19.80% annual revenue growth rate.
For comparison, Tesla's price-earnings ratio is around 75 (a company arguably in the same position as Ferrari on a valuation front) and Toyota's is a mere 9 or so.
Can Ferrari remain in first place?
At the moment, Ferrari is one of the top of luxury carmakers in the world in terms of margins and revenue growth combined. This is driven largely by its exceptional brand power and state-of-the-art designs. Whether it can remain in the top position as the auto industry adapts and pivots with advanced technologies like AI and autonomous driving remains to be seen. While the company is preparing for and already integrating hybrid and electric long-term strategies, the defining factor will be how new competitive companies take up market share, particularly advanced automobile companies that target luxury markets with high-end tech. Tesla has elements of this type of competitive advantage already.
Right now, the forward threat to Ferrari in terms of its margin dominance and brand positioning seems relatively low. For that reason, I hold Ferrari shares in my portfolio at around a 5% weight, and I do not feel compelled to reduce the position. Over time, I can see myself adding to the holding, especially as I see evidence the company's luxury electric automobiles are popular with the same elite clientele.
