Please ensure Javascript is enabled for purposes of website accessibility

Ferrari's IPO: What You Need to Know

By John Rosevear - Oct 20, 2015 at 7:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Ferrari's cars are the stuff of myth and legend. But will its shares be a buy when Fiat Chrysler Automobiles starts selling its stake in an IPO later this week? Here's a look at how things are likely to play out.

Image source: Ferrari

What: Fiat Chrysler Automobiles (FCAU) is set to sell 10% of subsidiary Ferrari in an initial public offering on Wednesday. The offering will be priced at $52, at the high end of the range anticipated in Ferrari's prospectus. 

Ferrari N.V., a Netherlands holding company that will own 90% of Ferrari S.p.A., will be listed on the New York Stock Exchange under the ticker "RACE." 

(Ferrari S.p.A. is the Ferrari company itself. The remaining 10% is held by Piero Ferrari, son of founder Enzo Ferrari. He isn't selling.)

So what: Ferrari's share price is likely to jump, at least at first. Bloomberg reported last week that the offering was "oversubscribed," meaning that demand for the shares greatly exceeded supply. With the shares available to the public consisting of just 10% of the company at first, supplies will be tight -- and demand for the shares is likely to be brisk.

That's likely to change over time, though, for a few reasons.

First, the supply of Ferrari shares in the market will increase greatly before long. Just one-ninth of Ferrari N.V. will be offered in the IPO, but the remainder will be distributed to FCA shareholders in a series of transactions over the next several months. 

Second, while Ferrari is a tremendously valuable brand and a solidly profitable company, its growth prospects are limited. Ferrari limits its sales to around 7,000 vehicles per year in order to preserve exclusivity (and thus its pricing power). That number could increase somewhat over time, but it's unlikely to ever exceed 10,000 sales a year. 

(One reason: As long as Ferrari's total worldwide sales stay below 10,000 a year, it's exempt from U.S. fuel-economy rules. Big powerful gasoline engines are at the heart of Ferrari's appeal, The company has no plans to change that any time soon, and adding a fuel-efficient small Ferrari just to meet regulatory requirements would likely damage the brand.)

Capping production makes all the sense in the world to Ferrari's business. But it means that the year-over-year growth that investors expect will be hard to come by. And that means that for all the luster of Ferrari's brand and all the romance of its fabled cars, its shares may not turn out to be a great investment.

That's especially true now that China's once-hot luxury market has slowed. China looked to be the best place for Ferrari to add some sales volume without compromising exclusivity, but that opportunity may have passed.

Third, Ferrari's cars are spectacular, but they cost a lot to develop. The Wall Street Journal recently noted that Ferrari's research-and-development spending in 2014 represented just over 20% of its revenue. That's nearly double the percentage spent by Porsche, and roughly four to five times the percentage spent by most of the big global automakers.

That means that Ferrari's costs will always be disproportionately high. The company's pricing power is impressive, but its margins are merely good: The difference is largely in the development costs. That's unlikely to change.

Now what: There may be a mad scramble for shares in the hours and days following Ferrari's IPO. That could send prices soaring -- but that increase is likely to be temporary. 

If you're looking to own a stake in the greatest car company of all, I think you'll be better off waiting a little while. Prices are likely to come back down after that buying scramble passes, and as more shares are distributed to FCA shareholders and make their way to the marketplace.

After a few months, we'll have a better read on how Ferrari is likely to look as an investment over the next few years. If there's a time to buy, that's when we'll find it. Stay tuned.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fiat Chrysler Automobiles N.V. Stock Quote
Fiat Chrysler Automobiles N.V.
FCAU

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.