Ferrari (RACE) stock has lost momentum, trading at around the same price it did at the end of February — the month when Lewis Hamilton announced he would be racing for the Scuderia Ferrari team. With momentum low, very few catalysts on the horizon, and a stretched valuation, I’m bearish on Ferrari, believing it could be ready for a drop.
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Ferrari’s Momentum Is Running Low
Lewis Hamilton’s decision to join Ferrari sent shockwaves through the motorsport world and caused the Italian company’s share price to surge. The seven-time (eight-time, in my humble opinion) Formula 1 World Champion’s move is expected to help the team’s sponsorship and financial performance, attracting even more attention to this historic brand.
While there are few stronger brands than Ferrari, Hamilton joining the Scuderia could elevate the brand image by merging his star power and winning legacy with Ferrari’s storied heritage. His influence may attract a younger, diverse audience and enhance marketability in a way that’s perhaps compatible with historic and iconic fashion brands like Gucci working with celebrities like Bad Bunny or A$AP Rocky.
However, this was February 1, and the share price hasn’t moved too much since. While the RSI (Relative Strength Index) and MACD (Moving Average Convergence/Divergence) indicators don’t suggest overvalued conditions, the faster-moving average line (MACD line) looks set to fall below the slower-moving average line (Signal Line). This potential crossover could indicate a bearish signal, suggesting that the stock might experience further downside in the near term.
No Near-Term Catalysts for Ferrari
In the near term, there appear to be very few catalysts that could push Ferrari stock higher. The company is releasing three new vehicles in 2024, but none of them are expected to be as transformational as the Purosangue. Moreover, this figure is two fewer new vehicles than the number of cars the company unveiled in 2023 — the caveat being that only three of the five released in 2023 were roadgoing.
I’d say we’re also unlikely to see catalysts in the form of rising sales volumes or margins. As of March, the company boasts a gross margin of 50.67%, which is significantly higher than the industry average.
In the first quarter of 2024, the firm’s adjusted EBIT margin was 27.90%, and its adjusted EBITDA margin was 38.2%. Both figures show modest year-over-year improvements from 26.90% and 37.60%, respectively. However, this is already very strong.
For example, its EBIT margin represents a 251.94% premium versus the consumer discretionary sector as a whole and outperforms luxury goods brands like LVMH (LVMUY).
One reason I believe it will be challenging to improve margins and volumes from here is that Ferrari’s business model operates so effectively by creating scarcity. The business model has succeeded for decades by delivering fewer vehicles than the market demands, creating a strong order backlog and additional value.
However, this also means that increasing deliveries could negatively impact margins. Ferrari’s rumored production cap is around 15,000 units per year. That’s around only about 10% higher than the 2023 output, indicating limited room for volume growth.
Ferrari’s Valuation Remains an Issue
Ferrari’s valuation metrics are simply extraordinary, even for a really quality company with market-topping profitability. The Prancing Horse stock is currently trading at around 55x trailing-12-months non-GAAP earnings and 52x forward earnings.
This puts it at a huge premium to all its peers, with the exception of Tesla (TSLA), which is trading like a tech company and not a car company. For example, Mercedes (MBGAF) trades at 4.6x non-GAAP TTM earnings and 5.7x forward earnings.
Of course, the caveat is that Mercedes’s near- and medium-term earnings are in decline, while Ferrari is on a steady and positive trajectory. However, Ferrari’s earnings are only expected to grow by 14.3% annually over the next three to five years. While that might sound impressive, it’s not enough to justify the valuation multiples that we see above.
In turn, this growth rate and valuation multiple leads us to a forward price-to-earnings-to-growth (PEG) ratio of 3.6x (1.0x or less is generally seen as undervalued). This is exceptionally expensive for a stock that only offers a 0.6% dividend yield.
Is Ferrari Stock a Buy, According to Analysts?
On TipRanks, RACE comes in as a Moderate Buy based on seven Buys, seven Holds, and one Sell rating assigned by analysts in the past three months. The average Ferrari stock price target is $426.26, implying 0.5% downside potential.
The Bottom Line on Ferrari Stock
Ferrari is an excellent company, boasting strong margins and an incredible brand story. It really is the quality company many of us aspire to own. However, the stock has an exceptionally stretched valuation, with a forward price-to-earnings ratio of 52x and a PEG ratio of 3.6x. These certainly aren’t attractive metrics. Moreover, momentum appears to be running low, suggesting that the stock could start giving back some of its gains soon.
