Mercedes and BMWs are cool but a new Ferrari (RACE) is the ultimate flex because they are so hard to get -- and that is the investment opportunity, suggests Jon Markman, growth and technology expert and editor of Strategic Advantage.
The key is limited production. Ferrari can sell as many cars as it can produce, so executives produce very few to make the vehicles more exclusive. Whereas some automakers are using more robots to bring down costs, Ferrari is taking the opposite route. Cars are handcrafted, custom made and they do not depreciate.
The 2013 LaFerrari was limited to only 499 units. The starting price was a staggering $1.4 million. If you can find one, it will cost you about $4,000,000 today.
The result is predictable. Ferrari operating margins are obscene by industry standards. The company earned about $80,000 in profit during 2020 on every vehicle it manufactured. And demand is off the charts. The backlog in 2021 is still five years at the current production rate. The SF 90 Stradale, Ferrari’s new $513,000 hybrid electric vehicle is sold out.
Ferrari has a business model that works because the brand is synonymous with exclusivity. For some model’s customers must be invited to purchase. Brand Finance, an analytics company found in 2020 that Ferrari was the world’s strongest brand for the second consecutive year.
With a market capitalization of only $41 billion, the valuation is significantly less than Ford (F) and General Motors (GM). Ferrari is a better business with brighter prospects and no worries about demand.
Ferrari is one of those rare businesses. It is unaffected by the global economy because its clientele is so exclusive. Higher costs are pushed to customers so macro inflation is irrelevant. Shares are selling off because investors believe demand will wane as the economy falters. This will not happen. The cars are sold out for the next 5 years.
Since its initial public offering in 2015, Ferrari shares have risen an average of 34.8% annually on a compounded basis. It’s down recently in the broad sell-off but looks good around this level.
