Ferrari (NYSE:RACE) stock has been red hot for the past year. In fact, the sports car manufacturer’s shares are up 52.3% over the past 12 months. However, investing in a stock with a price-to-earnings-to-growth (PEG) ratio of 3.11x is challenging (1.0x or lower is generally seen as undervalued), even when it has the strongest margins in the industry and an incredibly positive brand identity. That’s why I’m neutral on Ferrari. I just can’t get behind the stock, as it looks overvalued.
Is Ferrari Stock Still Worth the Hype?
Ferrari has some very strong credentials. The automotive manufacturer has one of the strongest brand identities across any sector globally. The prancing horse logo is instantly recognizable and synonymous with Ferrari’s luxury, speed, and Italian heritage. Moreover, the use of the Italian flag colors reinforces the company’s national pride (and being associated with Italy tends to be positive). It also has a long history of success in motorsport, with numerous championships and legendary drivers.
This brand image has certainly contributed to enduring demand for its vehicles, and this is also reflected in the company’s pricing power. Ferrari boasts a gross profit margin of 49.8% and an adjusted EBITDA margin of 38.2%. This really isn’t possible anywhere else in the sector, apart from luxury vehicles. Lamborghini may come close, but that information isn’t publicly available.
However, part of this pricing power is dependent on Ferrari not overproducing. If supply were ever to overtake demand, then Ferrari may be left with some tough decisions. Ferrari has typically only sold around 10,000 vehicles a year, but there are reports that the company has an upper production limit of 15,000 cars annually. The number of vehicles delivered in 2023 totaled 13,663, and part of this increase reflects the introduction of the Purosangue SUV, which would typically have a larger market than a sports car.
In some respects, therefore, Ferrari’s growth is limited by its own need to balance the demand and supply of its high-margin vehicles. By comparison, Tesla (NASDAQ:TSLA), which also trades at high multiples (63.5x forward earnings), produces more cars in three days than Ferrari does in a year. While I think Tesla is overvalued, it’s worth noting that Ferrari doesn’t have the volume option open to it.
Is There a Better Alternative to Ferrari Stock?
As alluded to, I don’t think Tesla — the world’s most valuable car company by market cap — represents a better investment opportunity than Ferrari. Having said that, they’re not entirely comparable, as they’re not operating in the same segment of the industry.
My issue with Ferrari is not its brand, but it’s the company’s valuation. The stock is currently trading with a forward price-to-earnings (P/E) ratio of 50.6x, making it one of the most expensive companies in the sector — with the exception of Tesla.
Moving forward, the P/E ratio falls, as its earnings are expected to grow at 16.2% annually throughout the medium term — that’s the next three to five years. In turn, Ferrari is currently trading at 45.3x projected earnings for 2025, 41.2x forecasted earnings for 2026, and 39.2x earnings for 2027. I don’t think these valuations provide much scope for the share price to rise further. As noted earlier, the all-important PEG ratio is an unenticing 3.11x.
One alternative is the UK-listed Aston Martin Lagonda (LSE:AML). It’s going through something of a turnaround under fashion tycoon Lawrence Stroll, and margin expansion is central to this. The British luxury car manufacturer saw its gross margin for 2023 improve to 39.1% from 32.6% the year prior. Aston Martin, which also has a very strong brand image, is aiming for a margin of around 40% and is looking to ramp production up over the long run from around 6,600 today.
Of course, the downside is that Aston Martin is severely indebted and is in dire need of a turnaround. Making matters worse, while the company has succeeded in some areas like margins, it’s been slow to ramp up production. Ferrari, on the other hand, is more of a well-oiled machine.
Is Ferrari Stock a Buy, According to Analysts?
Ferrari stock is rated a Moderate Buy on TipRanks 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 $414.91, implying 0.33% upside potential. The highest price target is $512, while the lowest is $349.28.
The Bottom Line on RACE Stock
Ferrari has a truly great business and an amazing brand. It’s no wonder that investors want a piece of it. However, the stock is simply too expensive for me to get behind. The average share price target is only marginally above the current stock price, and the stock’s all-important PEG ratio is 3.11x — that’s far above the levels that would get me interested. I’m neutral because it’s a great business and investors want great businesses. But I’m not buying because its valuation is too high.
