As humans, we are often under the impression that everything comes to an end at some point and that every bubble eventually bursts. In a way, Ferrari (RACE) falls under the same category. Many analysts think the company has been walking on a tightrope for far too long, especially considering its high valuation of 51x this year’s projected earnings. They say it’s unsustainable long-term, and if one wrong move takes place, such as an economic downturn or EPS growth slowing, the RACE stock and its investors will be punished. Perhaps they’re right. In addition, it’s impossible to let go of the feeling that its strict operations are a double-edged sword.
From one end, the company’s ongoing strategy has brought it to this point: manufacturing a limited number of cars every year, creating a shortage in the market, and thus fortifying its status as a true luxury vehicle. From the other end of the sword, this strategy makes it harder to elevate its margins in the long run, which probably prompts negative sentiments regarding its future success.
Our writer at Tipranks, Nikolaos Sismanis, recently covered the stock extensively, which you can read about here. Now, let’s briefly explore 3 points and see why everybody’s correct about RACE stock, both the doubters and the believers:
- Ferrari’s Financial Strength: For the bulls, Ferrari’s financials resemble the sound of its car’s roaring engine – they are just beautiful. Ferrari’s stock has been excelling thanks to its fine financial performance and the appeal of its luxury brand. The company has the best margins in the industry, and the demand for its cars is always higher than its supply. Ferrari’s strict manufacturing strategy led to an impressive EBITDA margin of 38.2% last year, compared to the car industry average of 11.8%, highlighting the vast difference between Ferrari and its other competitors. For example, Mercedes-Benz Group (MBGAF) has an EBITDA margin of 16.42% in 2024.
- Valuation Worries: Now, something for the Neutral position. Despite its strong financials, Ferrari’s stock is trading at a P/E forward multiple of 51x, raising doubts over its sustainability. Some investors are concerned that the stock might be overheated. They claim its high valuation leaves little room for error, and any slowdown in EPS growth could spell trouble for the stock, making it a risky bet, all while its P/E had risen consistently since 2016-2017 (when the multiples were in the ’20s). However, Ferrari has been flying, with its stock climbing over 763% in the last ten years, over 116% in three years, and over 50% in the last year. Moreover, its EPS has grown gradually in the last eight quarters and beat expectations.
- Recent Performance: This is another talking point for the Neutrals. Although Ferrari’s second-quarter results were impressive, its net revenue was up 16% year-over-year, its EBITDA margin was 39.1%, and the company’s order book is already filled through 2026, clearly showing future revenue. However, the high valuation and limited production raise significant doubts.
What Is the Target Price for RACE?
On Wall Street, Ferrari is a Moderate Buy, with 8 Buys, 5 Holds, and 1 Sell, reflecting the ambivalent sentiment toward the stock. The average price target is $476.60, reflecting a 4.40% upside.
Conclusion
Ferrari is a source of conflicting sentiments. On the one hand, it is the most prestigious car manufacturer. On the other hand, it comes with a strict strategy and a premium valuation that keeps raising doubts over its sustainability but still says something about investors’ expectations for the future. On the face of it, it looks like everybody’s right, the believers and doubters, and only time will tell who was right and who fell on his sword.
