Driving into the Future, How a Luxury Car Brand's Electrification and Racing Ventures Fuel Growth and Margins

What are the underlying business or industry changes driving this perspective?

• The continued emphasis on personalization and mid-single-digit price increases in that area signals a strategy to boost average selling prices (ASPs) and consequently, revenues.
• The introduction of the e-building and the commitment to electrification, including partnerships for best-in-class solutions, indicate a path toward product innovation and diversification that could enhance product mix and margins.
• The strong order book that extends well into 2025 across all geographies, combined with the mention of stable demand even in luxury markets, suggests strong future revenue streams.
• The expansion in lifestyle offerings, aiming to build scale and elevate brand visibility, coupled with steps toward carbon neutrality indicates an investment in brand desirability and sustainability that may enhance long-term value.
• The focus on racing successes, including the victory at the 24 Hours of Le Mans and expansions into new racing categories, reinforces the brand's heritage and could further boost brand equity and loyalty, positively affecting future earnings through merchandising and sponsorship deals.

How have these above catalysts been quantified?

• Analysts are assuming Ferrari's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.0% today to 22.3% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $9.33) by about April 2027, up from $1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 58.6x on those 2027 earnings, up from 55.5x today. This future PE is greater than the current PE for the US Auto industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 0.42% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 15.17%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Global tensions and geopolitical conflicts present external risks that could impact consumer confidence and spending, potentially affecting Ferrari's revenue and earnings.
• Supply chain disruptions and cost inflation could increase operational costs, negatively impacting net profit margins.
• The end of the engine supply contract with Maserati by the end of 2023 may lead to a decline in engine revenues, affecting overall revenues.
• Increased spending on Formula 1 and expanding the brand's presence in racing, as well as investments in lifestyle and digital infrastructure, might increase operational costs and flatten EBITDA margins.
• The strategy to maintain China at around 10% of shipments to avoid diluting margins could restrict revenue growth potential in one of the largest luxury car markets.

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $411.98 for Ferrari based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $506.72, and the most bearish reporting a price target of just $284.23.
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $7.4 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 58.6x, assuming you use a discount rate of 15.2%.
• Given the current share price of $410.4, the analyst's price target of $411.98 is 0.4% higher. The relatively low difference between the current share price and the analyst target indicates that they believe the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.