Investment Thesis
Ferrari (NYSE:RACE) reported earnings on May 7. Their core earnings grew 13% despite flat deliveries, driven by high-end models and customization. CFO Antonio Picca touted “positive business trends” and a full order book, but sticking to full-year forecasts left investors wanting more. RACE stock fell around 5.5% after the report, despite analysts praising strong margins and Ferrari’s commitment to its electrification plans.
Ferrari’s strength is built on brand image and exclusivity. This has allowed them to boast healthy profit margins due to premium pricing and controlled production volume, which has turned into a strong cash flow position over time. However, their revenue growth potential is capped on purpose. In fact, Ferrari’s order book is full for current models throughout 2025.
The company’s success depends on increasing demand by maintaining brand image, navigating the economic cycles, and adapting to changing consumer preferences. Due to the strength of their management team, low institutional shareholder turnover, and healthy financials, I am inclined to start coverage of Ferrari stock with a cautious buy in this recent weakness.
Earnings on track despite flat deliveries, Electrification efforts on focus
Ferrari delivered a robust first quarter with a double-digit growth in both revenue and profitability. This impressive performance came despite flat shipment numbers, highlighting the success of their “value over volume” strategy. A strong product mix and a growing personalization trend, that reached 19% of revenue on cars and spare parts, significantly boosted revenue. The positive reception of new models like the Daytona SP3, Purosangue, Dodici Cilindri further fueled growth.
On the innovation front, Ferrari remains on track to inaugurate its new electric vehicle production facility in June 2024 as explained in their quarterly call. The company also continues to strengthen its brand presence through successful events like the Miami Cavalcade and the Dodici Cilindri world premiere. They recently secured a new title sponsorship deal with HP (HPQ), solidifying their commitment to shared values like innovation and sustainability.
Despite the stock decline after reporting earnings, after failing to impress investors, Ferrari remains confident in its full-year guidance. This confidence stems from the positive business trends and a strong order book.
Management Evaluation
Benedetto Vigna, a seasoned scientist with expertise in semiconductor technologies, took the CEO helms at Ferrari in 2021. This marked a strategic shift for the iconic Italian brand known for its high-performance gasoline engines. Vigna’s background, including over 200 patents at STMicroelectronics (STM), suggest a clear focus on electric vehicle technology. This aligns with Ferrari’s recent commitment to developing electric and hybrid models, while upholding its legacy performance and exclusivity. While the stock price increase is nearly double under his leadership, it’s important to acknowledge the strength of Ferrari’s overall management team.
This team also includes, Antonio Picca Piccon, who has been the CFO since 2018. He spent 15 years at Fiat (STLA) in senior financial roles and member of the board at various companies, including Maserati. Under his financial leadership, he has put Ferrari’s finances in order after their IPO and the debt they had to take on after COVID. He has also improved ROE growth from an average of -8.86% over the last 5 years to a growth rate of 13.60% with ROE currently sitting at over 40%.
Finally, the duo of Ernesto Lasalandra, Chief R&D Officer and Gianmaria Fulgenzi, Chief Product Development Officer. Lasalandra is the brains in the EV efforts at Ferrari, he was also at STM with Benedetto Vigna as a group VP R&D General Manager and joined Ferrari in 2022. Fulgenzi has been at Ferrari since 2002, working in product development and manufacturing. I believe together they bring the expertise needed to push forward with efforts to adapt new models to shifting consumer preferences and, most importantly, innovation and technology, as explained in the latest quarterly results presentation:
Overall, Ferrari’s leadership team presents a strong combination of vision, execution, and financial resources. Although the Agnelli family (OTCPK:EXXRF) with almost 25% ownership of the company and with 36% of voting rights might be behind corporate moves, it seems like they have put together a strong management team. However, I would have to see some progress toward the production of their first electric vehicle next year and more stability in top management to give them a high rating, so for now, I am giving Ferrari’s management team a “Meet Expectations”.
Corporate Strategy
Ferrari prioritizes exclusivity and heritage over market share. They cap production and focus on high-performance gasoline and hybrid supercars, maintaining a “money-no-object” approach for status symbol clientele, in my view. Unlike competitors exploring full electrification, like McLaren or just exploring new markets like Aston Martin push into the SUV space, Ferrari carefully integrates a balance approach integrating electric technology to preserve brand identity and exclusivity. I have created the table below, highlighting the difference among its main competitors:
Ferrari |
Lamborghini (OTCPK:VLKAF) |
McLaren |
Aston Marin (OTCPK:AMGDF) |
|
Sales Estimates |
15,000 |
8,000 – 10,000 |
5,000- 6,000 |
6,000-7,000 |
Production Cap |
Yes |
Yes |
Yes |
May or May not (limited by model) |
Focus |
Exclusivity, high performance, limited production |
Bold design, powerful engines, exclusivity |
Formula 1 inspiration, cutting-edge technology, lightweight construction |
Luxury, performance, grand touring |
Target Customer |
Wealthy car enthusiasts seeking a status symbol |
Wealthy car enthusiasts seeking a flamboyant and powerful statement piece |
Wealthy car enthusiasts seeking a track focused driving experience |
Wealthy car enthusiasts seeking a luxurious and powerful grand tourer |
Recent Strategy |
Balanced Innovation with new models including SUV. Half their sales are hybrids. Developing new all-electric vehicle technology. |
Hybrid expansion. Their core focus is V10 and V12 engines but plans to introduce hybrid models to comply with emission regulation and shift in consumer preferences. |
Focus on hybrids. Committed to electrification, with all models being hybrid or electric by 2030. Leverage brand through F1 participation. |
SUV focus and brand rejuvenation. They are also investing in branding through their Formula 1 participation. |
Source: From companies’ website and presentations
This time I did not include market share as this is not an important metric for luxury supercars brands as they tend to focus on exclusivity versus volume.
Valuation
Ferrari currently trades at around $401 after dropping around 6% after reporting earnings on May 7th.
Employing a conservative 10.5% discount rate (r). This represents a hurdle rate that an investor expects to receive, considering time value and inherent risk of that investment. To calculate it, I used a 4.5% rate for time value and because I consider RACE a company with healthy financials and strong management, I used a 6% average market premium.
Then, using a simple 10-year two staged DCF calculator and I reversed the formula to obtain its implied Free Cash Flow (FCF) growth rate which is around 33.5%.
$401 = sum^10 FCF (1 + “X”) / 1+r) + TV FCF (1+g) / (1+r)
*I also added Book Value in the calculation
That is, the market currently anticipates Ferrari’s FCF to grow at a 33.5%. However, Ferrari’s actual Levered FCF growth has been significantly higher, exceeding 220%. For a more realistic comparison, I am using Ferrari’s average FCF growth over the past three years, which is still higher at a 58.44%.
This suggests that Ferrari is clearly in a phase of high growth. Compared to the historical growth rate, the market expectation of 33.5% growth might indicate an undervaluation of the company. Furthermore, as indicated in the table below, I believe production will continue to increase in the future, especially after the introduction of new models including the all-electric Ferrari in late 2025. These factors suggest the growth rate could be even higher than the market’s current projection of 33.5%.
Risks
I find that Ferrari has three key risks to achieve and maintain its growth potential:
- Economic downturns: a global economic slowdown could impact demand for luxury cars. While strong luxury brands might be less affected due to their wealthy clientele with more stable disposable income, delivery and stock prices could still suffer.
- Market misunderstanding: Ferrari’s niche market and limited production creates a high valuation by some metrics. This, combined with high insider ownership of almost 35%, makes it difficult to compare Ferrari to traditional mass production carmakers. However, Ferrari’s strong financials and capped production strategy help mitigate this risk.
- Electric Vehicle Delay: missing the late 2025 electrification goal would be a major setback. Most luxury supercar brands are shifting toward electric or hybrid models to meet stricter emission standards and changing consumer preferences. A delay in this project could negatively impact investor trust in the current management team.
Technical Analysis
The stock price was priced for perfection when Ferrari reported earnings May 7th, despite delivering a good quarter and guidance was reaffirmed the stock declined. The results just left investors wanting more and didn’t get an excuse to go over its recent all-time of $442.80 which is around 10% above the current market price. However, I believe based on technical analysis that the price will fluctuate between $450 – $335 until the electric plant inauguration in June and anticipation for the next earnings report. I will review my investment thesis as needed when it breaks this band.
Takeaway
Ferrari’s iconic brand fuels premium pricing, healthy operating margins, and loyal clientele. They are innovating with electric vehicles, ensuring future relevance. While an economic downturn is possible and its valuation seems complex, the company’s healthy financials, a multi-year order book, and experienced leadership inspires confidence. Due to the price of the stock near an all-time high, there could be some near term fluctuation and investors will need more growth expectations to fuel a rally. Any weakness presents a potential buying opportunity, and today’s drop after reporting earnings leads me to start my coverage with a cautious Buy.