Ferrari (NYSE:RACE) trades at a premium to most of the automotive sector. It has brand value, a significant economic moat, and maintains the best gross and operating margins in the sector. It’s also moving into the SUV market with the Purosangue and recently announced that Lewis Hamilton — the most successful driver in F1 history — will join the team in 2025. However, as good as Ferrari is, it’s hard to put my money in a company that trades at 51.8x forward earnings and has a price-to-earnings-to-growth ratio of 3.6x.
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Therefore, I am neutral on RACE stock.
Ferrari’s Strong Results
Currently, Ferrari has a market cap of $78.6 billion and achieved revenue of €6 billion and net income of €1.25 billion in 2023. Net revenue was up 17.2% on a constant-currency basis, while adjusted diluted earnings per share grew 35.6%.
That’s a phenomenally strong performance, but it was all achieved by selling just 3.3% more vehicles. Clearly, Ferrari isn’t in the volume business. While some of its peers produce and sell more than a million vehicles a year, Ferrari has traditionally sold around 10,000. This number has been growing, however. The car manufacturer sold 13,663 units in 2023.
Ferrari’s most impressive statistic isn’t its top speed but the margins it can and does achieve. Its record 2023 results were achieved due to a significant adjusted EBITDA margin of 38.2%. Moreover, Ferrari’s gross profit margin is 49.8%. That puts it significantly above its peers in the automotive sector. Meanwhile, Tesla (NASDAQ:TSLA), which has been known for its strong margins, had a gross profit margin of 19.8% over the past 12 months.
These margins are only possible due to its brand recognition. The company has developed a significant economic moat over decades by producing high-quality and iconic sports cars. Ferrari is also synonymous with F1, which is reportedly the fastest-growing sport on social media. Bolstering this will be Lewis Hamilton, by far the sport’s biggest name, who is set to join the team in 2025. A global superstar in every respect, Hamilton will undoubtedly expand the manufacturer’s allure.
Building on this is the company’s strong financial position. Ferrari has a net debt position of €1.36 billion. That’s nothing to be concerned about, given that some of the liabilities relate to financing options and loans for buyers. Likewise, free cash flow can lag before the launch or sale of a new model. Some debt may also be related to the R&D costs of developing the Purosangue SUV, which represents a change from the company’s focus on sports cars.
It’s also worth recognizing that the size of the SUV market is considerably greater than the sports car market. The company says it will keep Purosangue output to no more than 20% of its total production, which could be expanded to 15,000 cars in the coming year. As such, only about 2,200 to 3,000 SUVs will be available annually.
The Stock’s Price Tag
One has to admire the Ferrari’s margins. These margins are the envy of the industry. So much so that Aston Martin (LSE:AML) had poached a former Ferrari boss to lead its revival. However, the price tag is the issue, and I’m not talking about the cost of the cars. Ferrari is trading at 51.8x forward earnings, putting it at a huge premium to almost every car manufacturer, with the exception of Tesla, which has a very different value proposition.
Moving forward, Ferrari’s forward earnings ratio falls to 46.5x in 2026, 42.5x in 2027, and 47x in 2027, based on analysts’ expectations for growth (although only one analyst made a projection for 2027). Meanwhile, the company’s price-to-earnings-to-growth ratio sits at 3.6x. These figures, regardless of the firm’s brilliant margins, don’t look overly attractive. It also means there’s very little margin for error. If Ferrari were to miss guidance, I’d expect the share price to correct significantly.
Is Ferrari Stock a Buy, According to Analysts?
Ferrari stock is a Moderate Buy, according to analysts who have covered it over the past three months. There are currently seven Buys, six Holds, and one Sell rating. The average Ferrari stock price target is $404.20, indicating downside potential of 7.3% from the current share price. It appears that the growth of the share price appears to have outpaced analysts’ forecasts.
The Bottom Line
Ferrari stock is expensive, and perhaps too expensive, in my opinion. The company has excellent margins that are the envy of the industry, very strong brand recognition, and several other tailwinds. However, it’s hard to see beyond the price tag. The stock’s forward earnings multiples are not particularly attractive, and its PEG ratio of 3.6x looks like something of a warning sign.
