If you're an investor, it's pretty easy to get swept up in the electric vehicle (EV) stock craze. After all, it's almost certain to be the future, and it's still in the early innings of the evolution and transition -- a solid combination for great returns.
As a result, many investors may be overlooking a hidden gem that's thriving and doesn't share many of the concerns that traditional automakers do. Here's exactly why investors should have a glance at Ferrari (RACE 2.49%) and its lucrative business.
Show me the money!
There are a number of factors that many investors despise about the automotive industry. It is notorious for being capital-intensive, low-margin, and highly susceptible to economic cycles.
Savvy investors, however, realize that Ferrari bucks all these trends. Let's start with one of the most eye-popping comparisons between Ferrari, other luxury autos, and traditional automakers.
F Operating Margin (Quarterly) data by YCharts.
Ferrari's pricing power is like none other, often costing hundreds of thousands of dollars per vehicle. As the company increases personalization and introduces larger vehicles, such as the Purosangue, its revenue has room for growth.
As an investor keeping tabs on the automotive industry, you'll often hear management talk about increasing sales or young start-ups accelerating production. You won't hear the same emphasis from Ferrari, an automaker focused on an ultra-luxury target audience.
In fact, Ferrari powers its brand image through stringent exclusivity -- it's not easy to purchase a Ferrari, even if financially capable -- and it commands lofty margins by keeping a lid on sales, with only calculated increases and ensuring demand always exceeds supply.
To demonstrate its pricing power, look no further back than the most recent second quarter. Ferrari's total shipments of 3,392 units were down 2% compared to the prior year, yet net revenue jumped 14.1%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped nearly 32%.
Economic woes? No problem
The previous point goes hand-in-hand with this one: Ferrari's wealthy target audience enables the company to be more resilient to economic swings. Unlike typical automakers that plunge with economic downturns as mainstream consumers are more weary of big-ticket items, Ferrari caters to the ultra-wealthy who are more likely to buy even an ultra-luxury vehicle, rain or shine, economic downturn or not.
Morgan Stanley automotive analyst Adam Jonas once wrote to investors: "Ferrari is as close to recession proof as it gets in our coverage."
Another intriguing thing about Ferrari is that while most investors complain about the capital-intensive automotive industry -- and that remains partly true with Ferrari -- the ultra-luxury automaker is, yet again, different. Ferrari sold only 13,221 vehicles in 2022, and that low volume means the company can operate with a substantially smaller footprint than its rivals and, thanks to its lucrative margins, has no need to accelerate production to fill capacity.
Further, Ferrari generates significant revenue from its spare parts, sponsorships, commercials, brand, and even its engines. Take, for example, its engine sales to Maserati, although the contract is nearing an end.
The bottom line
It's an interesting time for investors in the automotive industry. On the one hand, you have start-up EVs trying to mark their territory in a brave new world; on the other hand, traditional automakers, such as Detroit icons, are trying to transition.
But that leaves many investors overlooking Ferrari, which doesn't have many of the drawbacks of traditional automakers and boasts lucrative margins. Further, investors may not realize that while internal combustion engines are still the heart of Ferrari's vehicle portfolio, its hybrid deliveries reached 43% during the second quarter, more than double the prior year's figure.
Ferrari has an impeccable and valuable brand image -- driven by racing heritage, juicy margins, and resilience to a recession -- and is only a few steps away from becoming an ultra-luxury hybrid and EV maker as well. The truth is that while many investors are eyeballing start-up EV companies, many continue to overlook the hidden gem in the automotive industry. Ferrari just might be the best automotive stock out there.
