The trend for the automotive industry is undeniable: Electric vehicles are the future, and manufacturers must adapt or die. That electrified future brings with it some serious challenges for mainstream automakers, but it means even more concerns for a those accustomed to luxury-like profit margins and exclusivity.
Ferrari (RACE -1.04%) investors must watch developments closely over the next few years, which will include the advent of the racing legend's first fully electric supercar. This could also change the investing thesis on a stock that has been, arguably, one of the best options for auto investors.
What makes Ferrari great?
In terms of investing, Ferrari is a unicorn in the automotive industry, which is often plagued with thin profit margins. One glance at the chart below, and you'll understand why savvy investors have been drawn to the stock.
RACE Operating Margin (TTM) data by YCharts.
Ferrari is a unicorn in the automotive industry because while companies like Ford, General Motors, and Tesla (TSLA 12.06%) want to sell as many vehicles as profitably possible, Ferrari keeps a lid on sales to maintain extreme exclusivity and pricing power.
In fact, while mainstream automakers can sell millions of vehicles annually, Ferrari only sold 11,155 units in 2021 and 13,221 in 2022. The supercar maker powers its brand image through its racing and luxury heritage and simultaneously leverages its pricing power through exclusivity -- it controls how many vehicles it sells to keep supply lower than demand -- which has historically worked perfectly for its profit margins.
Beyond pricing power and exclusivity, the fact that Ferrari owners can pay into the hundreds of thousands for a vehicle means they aren't looking for a Ferrari to be an everyday electric vehicle...yet. That buys Ferrari some much-needed time to figure out a couple of challenges that could disrupt its business and gives investors time to evaluate its investment potential.
Challenges ahead?
Right now, Ferrari only offers hybrids, and it won't unveil its first fully electric vehicle until 2025. That evolution, though, presents a number of concerns for Ferrari investors.
- First, it has historically maintained a strong brand image and pricing power through its racing heritage, as previously mentioned, but that heritage might not transfer to its electric vehicles. One could even argue that Tesla is actually the Ferrari of EVs in terms of performance and leading technology. While Tesla lacks a F1 racing team, it has produced a number of high performance vehicles that rival, and sometimes top, vehicles from Ferrari in acceleration.
- Second, only Tesla has proven that it can consistently produce strong profit margins manufacturing EVs, and it did so by cranking up its production and scale quickly, ahead of mainstream automakers. At a low sales volume like Ferrari maintains, EVs are still wildly unprofitable. Consider this: Ford loses roughly $66,000 on every EV it rolls off the production line. Ferrari can likely produce an EV with a staggering price tag and make plenty of money, but it's worth considering that low volume EVs for many automakers are tough business currently.
- Third, Ferrari will have to time its move into EVs appropriately or risk building vehicles its core consumers aren't interested in. The truth is, many Ferrari owners likely favor power, speed, prestige, luxury, and even the sound of a roaring engine over the practicality of a fully electric vehicle, at least for the time being. Mainstream consumers will likely be ready for EVs before traditional Ferrari consumers will, which is why the automaker is taking its time in joining the EV party.
The finish line
With those and other challenges in mind, Ferrari anticipates that 40% of its lineup will be fully electric, 40% hybrid, and only 20% traditional combustion engines by 2030. More importantly, Ferrari management has made it clear that the move to EVs won't come at the expense of profitability, although we'll see if that ends up being management-speak or reality. The company still targets an EBITDA compound annual growth rate (CAGR) of 9%.
Ferrari has long offered investors a safe haven in the automotive industry, with demand for its exclusive vehicles outracing the supply it offers and its pricing power driving strong profit margins. Those qualities will be challenged as Ferrari evolves into a new world of EVs, and that's why the company isn't yet offering a fully electric vehicle.
Chances are that Ferrari will figure out a way to produce an EV worthy of the prancing horse logo. Chances are that Ferrari will remain a fantastic stock in the automotive industry. We'll just have to wait a few years to see how it's done.
