When thinking about car manufacturers, Tesla will likely come to investors' minds first. Perhaps Detroit automakers like Ford Motor Company or General Motors will also get some attention.
But there's a top automotive stock that has crushed it for shareholders in the past five years that you might not immediately think about. Its shares have more than tripled in value since March 2019. I'm talking about Italian luxury vehicle business Ferrari (RACE 2.49%).
With the stock racing to all-time highs, is it time to buy this massive market outperformer?
Strong fundamental performance
It shouldn't come as a shock that in order for a stock to rise rapidly over the years, the underlying business has to also put up strong financial numbers. This has certainly been the case with Ferrari.
Between 2018 and 2023, Ferrari's sales increased at a compound annual rate of 11.8%. This was despite revenue dipping 8.1% in 2020, when manufacturing was halted temporarily due to the coronavirus pandemic. Other than that disruption, this is a consistent and steady company that benefits from durable demand trends.
When it comes to the bottom line, there's also a lot to be excited about. Ferrari's operating income soared at an annualized pace of 14.4% in the last five years. This points to the various levers that the business can pull on to grow earnings, with changes in volume, pricing, and product mix all being tailwinds.
Even in 2023, when macro and industry pressures impacted electric vehicle (EV) leader Tesla, leading to contracting margins, Ferrari saw its net income rise at a faster clip than revenue.
This is a luxury brand
It's important to understand what exactly makes Ferrari unique in what is otherwise an extremely competitive industry. A valid argument can be made that this business straddles two separate industries. It's certainly a car company, but Ferrari is also a top luxury brand.
That brand is what differentiates this business. And it has led to tremendous pricing power and exclusivity. Not only does someone need to have the cash to buy a $400,000 sports car, but often, they have to join a waiting list to even have the opportunity to buy a new model. Ferrari sold 13,663 units in 2023, an artificially low number that's purely by design to maintain the brand's standing. Lower supply only helps to support higher demand from consumers.
The business has truly exceptional profitability. In the past five years, the gross margin has averaged a superb 50.5%. This is even better than consumer favorite Apple.
Given that Ferrari's target audience is the super wealthy, the company is protected in recessionary periods, especially compared to other car manufacturers that experience bouts of notable cyclicality. There are about 8 million individuals worldwide who have a net worth greater than $5 million. This means that Ferrari has a sizable addressable market to continue selling to, all with the financial means to spend big.
What about the valuation?
From an investment perspective, Ferrari hardly flies under the radar anymore. The shares have seriously rewarded investors in the past. And just in the last 12 months, they have soared 53%.
Based on its forward price-to-earnings ratio of 50, the stock doesn't look cheap by any stretch of the imagination. I'd even say that Ferrari provides zero margin of safety for prospective investors, as all of its favorable attributes look to be fully priced in.
Therefore, I think the best move is to add this business to your watch list, continue following it, and wait for a much more attractive valuation to take advantage of.
