Investment Alert: Buy RACE Under $250/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
At his recent “Woodstock for Capitalists” event, otherwise known as the Berkshire Hathaway annual shareholder meeting, Warren Buffett “poo, poo’ed” the idea of buying a car company.
His comments went something along the lines of “I know where Apple will be in 5 to 10 years from now but I don’t know where a car company will be.” He went on to discuss Ferrari, and how it “only” sells 11,000-12,000 vehicles annually.
We did our research and discovered that 11,155 models were sold in 2021 while 13,221 were sold in 2022. And that got us thinking, is there more to Ferrari than meets the eye?
What sparked the sales growth between 2021 and 2022 when the stock market fell by almost 20%? We believe we have uncovered the answers and they make for a compelling investment case for this premier car manufacturer, even if we agree with Buffett’s logic generally on buying the stock of car manufacturers.
- The luxury market is forecast to reach $1.5 trillion by 2025.
- Ferrari is planning to electrify its lineup and expand its buyer segment via its entry into the luxury SUV market.
- The company’s valuation is high, so investors may want to wait for a pullback before buying shares.
Ferrari Is a Luxury Brand, So What Is The Future Of Luxury?
The fact that Ferrari was able to grow sales in 2022 when the market fell suggests that it is fairly immune to the tides of economic fortune that affect most other firms. Ferrari target the ultra-rich consumer who is largely unaffected by stock market swings and recessions. A depression would be cause for concern, but absent that armageddon future, consumer demand for Ferraris has been and is likely to remain inelastic.
A Bain study supports the thesis that demand will remain firm, if not grow. The prestigious consulting firm reported that the size of the luxury market is forecast to reach $1.5 trillion by 2025. That represents a CAGR of 10% between 2020-25.
For Ferrari to do well, not only is growth in the luxury market needed but also the world’s ultra wealthy need to feel like a Ferrari purchase is just a drop in the bucket, and the statistics suggest that’s precisely the case. The wealth of the world’s billionaires grew by an astonishing 54% during the pandemic and the number of millionaires increased by almost 10% to around 56 million in 2021.
Tailwinds for Ferrari
More rich people getting richer is the type of thing that keeps Bernie Sanders up at night but we’re not here to opine on that. Instead, we’ll simply focus on the facts and they point to further tailwinds for Ferrari. One such is the firm’s electrification strategy.
EV sales are booming – they are expected to reach an astonishing 33 million sold in 2030 – and in 2025 Ferrari is expected to reveal its first fully electric car.
A further catalyst for the stock is its entry into the luxury SUV market thanks to its Purosangue model. This expands the buyer base for Ferrari beyond the sports car aficionado. RBC Capital forecasts 3,000 sales of Ferrari luxury SUVs this year, representing a large percentage – ballpark 25% – of overall units sold.
Ferrari doesn’t sell a whole lot of cars but it surely makes up for that with steep pricing. The result is $5.4 billion in sales in 2022, up 19.3% from 2021, which in turn was up 23.4% from 2020. We see that trend continuing with $6 billion in sales this year, $6.6 billion next year and close to $7 billion by 2025.
The one knock on the company now is its valuation. It’s trading at 49x earnings, and RACE share price just crept above the analysts consensus target price of $292 per share. So, we would like to see the share price correct towards $250 before starting a position. When it drops towards that level, we believe the upside will be attractive and the margin of safety sufficient to pick up shares. Until then, we’ll keep an eye on it on our watchlist.