While I can’t afford to buy a Ferrari (NYSE: RACE), I can invest in the iconic firm via the stock market.
Like its luxury vehicles, however, the company’s shares are priced very expensively. This is putting me off investing more money into Ferrari inside my Stocks and Shares ISA.
But if there was a stock market crash in 2024, I wouldn’t hesitate to double down on this company. Here’s why.
Not a car stock
Ferrari shares are currently trading on a forward price-to-earnings (P/E) ratio of 51.
In simple terms, this forward P/E ratio indicates that investors have to pay $51 for every $1 of earnings that Ferrari’s expected to generate in FY2024.
Therefore, the market is pricing in a very high probability that Ferrari’s medium-term earnings will grow significantly.
But investors could quickly counter that Ford trades on a forward P/E multiple of 6.3, which makes Ferrari look grossly overvalued for a car stock.
However, it’s important to remember that this is an ultra-luxury company that just happens to sell cars. It operates according to a dynamic that is distinct from almost every other firm on earth.
A Veblen product
In most sectors, price increases are a necessary evil. But in Ferrari’s rarified world, many uber-wealthy customers actually welcome price increases because this makes the product even more exclusive and desirable.
In economics, this is called the Veblen effect. In social psychology, it relates to the scarcity principle.
The firm’s CEO Benedetto Vigna succinctly described this powerful phenomenon when he said: “The client is giving a value to our cars because they are unique, because they are limited, because they are exclusive. We could make more, but that does not make sense. We will offend our clients.”
In 2023, Ford sold 4.4m cars worldwide while Tesla sold 1.8m. Meanwhile, Ferrari delivered just 13,663 vehicles, yet annual net profit exceeded €1bn for the first time.
Since 1947, fewer than 250,000 Ferraris have been produced. That’s less than Porsche sells each year!
Purring financials
To see the firm’s pricing power in action, consider that in 2015 revenue was €2.85bn. It shipped 7,664 cars at an average selling price (ASP) of €270,000 per vehicle. Its EBITDA margin was 25%.
In 2024, the company expects to generate more than €6.7bn in revenue selling just over 14,000 cars at an ASP above €400,000. The EBITDA margin should be over 38%!
Management has confirmed that its order book “remains strong across all geographies and covers the entire 2025.”
The future
Ferrari’s luxury cars have been roaring out of its Maranello factory in northern Italy for around 80 years now. So the transition to electric vehicles (EVs), which don’t naturally rev and roar, is a potential challenge.
By 2030, it is aiming for EVs to make up 40% of units sold. But perhaps customers might not like the manufactured EV sounds! This could harm sales and create uncertainty around the long-term EV strategy.
Nevertheless, there are about 8m (and growing) individuals worldwide with a net worth greater than $5m. This means Ferrari is selling its 14,000 cars to less than 0.2% of its potential market every year.
If it gradually increased that to 0.3% over time, without offending clients, the stock should perform well. Therefore, I’ll be loading up on any significant share price dip.
