Ferrari (NYSE:RACE) stock is up 25.6% since the turn of the year. Yes, it’s a company that makes cars, but it’s also a luxury goods manufacturer, and its stock has outperformed all of its major luxury peers this year. With its Q1 results disappointing investors, the surging share price has a lot to do with momentum and possibly the announcement that Lewis Hamilton would join the Ferrari F1 team for the 2025 season. Nonetheless, I’m neutral on this stock due to its high valuation.
Ferrari’s Q1 Results
Ferrari’s stock took a hit following its Q1 results in early May. The luxury car manufacturer reported earnings per share of €1.95, up from €1.63 in the same period last year. Its adjusted EBIT margin also improved by 100 basis points. While this surpassed the consensus estimate by €0.10, and revenue rose 11% to €1.585 billion, it wasn’t all rosy.
Investors’ enthusiasm waned partially due to disappointing shipment figures, particularly in Mainland China, Hong Kong, and Taiwan. Deliveries to the Asian states dropped by 20%. Although EMEA and the Americas saw modest increases of 3% and 4%, respectively, overall shipments remained flat compared to the previous year. Total shipments came in at 3,560 units.
Despite CEO Benedetto Vigna hailing Q1 as “very positive,” Ferrari maintained its guidance for the year. Projections include net revenues of around €6.4 billion, slightly below the expected €6.5 billion, and adjusted earnings targeted at over €7.50 per share, falling short of the estimated €7.77.
Ferrari Isn’t Just Any Luxury Stock
Ferrari shareholders and enthusiasts will argue that the Maranello-headquartered company isn’t just any luxury stock. The company has managed to create an almost unmatched luxury brand, surpassing peers like Lamborghini and Aston Martin (LSE:AML) in terms of prestige and quality.
Ferrari’s business plans — crafted over decades — is part of the reason for this. The company always aims to sell fewer cars than there is demand, thus enhancing exclusivity and pricing power (Ferrari has the best margins in car production). As Enzo Ferrari once said “Ferrari will always deliver one car less than the market demands.”
Moreover, the company gives preference to existing customers, with 74% of 2023 deliveries going to existing owners. This restrictive approach to sales also gives management two years of visibility regarding the order book. Buyers are often simply happy to get their name down and wait for the new model to be delivered.
Limiting the availability of its models also bolsters Ferrari’s pricing power through mechanisms in the secondary market. With the understanding that Ferrari deliberately produces fewer cars than the market demands, buyers can be confident that their new purchases will retain their value better than overproduced cars. In turn, this contributes to Ferrari’s capacity to sell its new vehicles with industry-topping margins.
The above factors have likely contributed to the surging share price in spite of a rather unconvincing Q1 performance.
Lewis Hamilton to Join Ferrari
On February 1, it was announced that seven-time (eight-time if you ask me) F1 champion Lewis Hamilton would be joining Ferrari’s F1 team for 2025. The impact on the share price was dramatic, with the stock jumping more than 10% that very same day. The momentum appeared to carry on through February, with the stock moving from $345 at the beginning of the month and ending at $424.
Ferrari’s Unsustainable Valuation
Despite Ferrari’s impressive business model, incredible brand, and strong margins, I believe Ferrari trades at a valuation that is very hard to justify. One reason for this is that Ferrari won’t simply increase production to raise earnings. It can’t because it’s not part of its business model. And personally, I’m not convinced that margins can get any stronger.
For me, that’s an issue when the stock trades at 53.5x TTM earnings and 49.9x forward earnings. This represents a huge premium to every car company, except Tesla (NASDAQ:TSLA), and major luxury goods companies.
Is Ferrari Stock a Buy, According to Analysts?
Ferrari stock is rated a Moderate Buy, according to analysts. That’s based on seven Buys, seven Holds, and one Sell rating. The average Ferrari stock price target is $427.72, with a high forecast of $512.00 and a low forecast of $355.00. The average price target represents 1.3% upside potential.
The Bottom Line on Ferrari Stock
As stated above, while Ferrari is rated a Moderate Buy, analysts only see 1.3% upside potential. This could reflect the fact that the share price has surged beyond most analysts’ expectations in recent months. However, I’m just not sure how we could get higher from here with margins and volumes potentially close to their limits. It’s a great company, and I’d love to invest in it because I want it to succeed. But I simply can’t put my money behind it at its current valuation.
