Who doesn't love sports cars? If you're like me, you might think the whole thing is a business close to crossing the finish line, and not in a good way. But sports cars are still a thing for a lot of people. They represent status, a dream, money and the high life. And one of the best known icons of that dream is Ferrari.
Before we answer this, let's look at some data.
Despite being a 70 year-old company, Ferrari went public for the first time in 2015 after an internal reorganisation and appointing Sergio Marchionne as the new CEO. If you had invested €1,000 on the date of the company's IPO, you would have more than €4,000 today, increasing your capital by 365%. The same amount invested in the S&P 500 index's shares would be worth around €2,000. The payoff is undeniable.
The positive trend hasn't been confirmed during last year, where the company's shares slightly underperformed compared to the average U.S. company. Ferrari's share price has risen by 15% compared to 32% for all the companies in the S&P 500 between August 2020 and August 2021.
Let's dive into Ferrari's past and future plans to get a better overview.
In 1908, A 10-year-old Enzo Ferrari saw his first car race and immediately got hooked. After being part of the Italian army in World War I, he managed to find work at small automakers as a young adult.
By the early 1920s, Enzo landed a job at Alfa Romeo as a race car driver, and in 1929 launched Scuderia Ferrari, which by 1933 had basically become Alfa's racing division. In 1937, Enzo shut down Scuderia Ferrari and became the head of Alfa Romeo's factory racing operation, Alfa Corse. In 1939 Enzo decided to start his own company under a different name due to a non-competing agreement that would last five years. The first car under the name Ferrari was launched in 1947.
In the late 40s, Luigi Chinetti, a successful Italian-American race driver, approached Ferrari about the prospect of building sports cars for the public. Ferrari was hesitant because his company's primary purpose was to win races. Chinetti managed to convince Enzo, and in the early 1950s, the very first Ferrari dealership in the U.S. was opened. This turned Ferrari's business upside down. Legendary cars such as the California Spider, the GTO and the Testarossa soon appeared.
By 1969, Enzo realised his company needed additional resources not only to be successful but also to survive and decided to sell 50% of the business to FIAT.
After the passing of Enzo Ferrari, longtime executive Luca Cordero di Montezemolo assumed the position of President and later Chairman. Under his guidance, Ferrari was transformed into a global luxury brand.
Today, the company sells its supercars for hundreds of thousands of dollars, and its hypercars for millions, while still winning races.
Ferrari has come a long way in the past seven decades, starting as a fledgling race car builder and ending up as a multimillion-dollar global brand.
In 2015, Ferrari's IPO on the New York Stock Exchange valued the company at nearly $10 billion. Now, the company's market cap has risen to more than $35 billion. This makes the carmaker one of the most valuable and recognisable brands in the world. True to its roots, Ferrari trades on the New York Stock Exchange under the ticker RACE.
Since its IPO, Ferrari's evaluation has always been high by automotive standards and analysts were incredibly confused by its business model. On the one hand, Ferrari's pricing power, high margins, and ROIC made it a great business. On the other hand, that pricing power came with a cost. Ferrari only sells cars to fund its racing program. That's the way it has always been since Enzo Ferrari decided to create the Scuderia Ferrari. Racing is expensive, so Ferrari started building "normal" cars to fund the passionate side of the organisation.
It’s also important to know that Ferrari artificially limits its annual production figures to preserve the exclusivity of its cars. But without growth, how do you convince investors to buy your shares?
It turns out that Ferrari can generate sales and profit growth over time without compromising the exclusivity of its brand. The development of China's luxury market has been a blessing to the company, as it increased the global pool of eligible Ferrari buyers. As Ferrari's total orders have risen, the production (and thus sales) increased incrementally over time without diluting the brand.
That’s made an impact on profit. According to the last earnings report, Ferrari's net revenues nearly doubled versus the prior year and are up 5.2% versus Q2 2019.
One big challenge the company might face is the rise of concerns around environmental pollution. Until a few weeks ago, Ferrari wasn't interested in developing fast electric cars, but that’s recently changed. In June 2021, the company unveiled the first hybrid sports car, joining the race to electric. Investor's reactions to the new hybrid model have been incredibly positive, and in the last month, the share price has been rising.
Some supporters are scared that this route might damage the reputation of the company. People that usually buy Ferraris aren’t that worried about the environment; they want to buy a fast car that is thrilling to drive. The company will have to face a tough challenge trying to balance the needs of a modern world, forced to evolve towards a more sustainable production, its luxury status and the old-school buyers.
For some people investing in a company that produces luxury sports cars it's like investing in a piece of art. Ferrari's are considered art at so many levels due to the craftsmanship, the exclusivity and what they represent. Investing in Ferrari is a bet on whether the company will be able to keep on maintaining its exclusivity status while developing new, more sustainable technologies.
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