Ferrari (NYSE:RACE) cars are not easy to buy, command a high price and there is a waiting list.
Ferrari needs no introduction, its brand perhaps the most recognizable in the world, it is synonymous with professional motor-sports racing and an upscale lifestyle.
Ferrari defines its own category of luxury sports cars and does not compete on the basis of price with mainstream automakers, it has no competition, it is The Aristocrat of the automotive sector.
Investors in the stock should not think of Ferrari as a luxury brand and not just a car maker, and so unlike most car manufacturers that have highly cyclical results, Ferrari’s business is resilient even in a recession.
Yes, Ferrari makes and sells cars, but its business model is that of a luxury products company.
Ford (NYSE:F) and General Motors (NYSE:GM) and many others are in the business of mass production, sells millions of cars per year at prices affordable to the middle class, they compete on cost and price, which results in lower profit margin due to promotional spending and inventory discounting.
Ferrari only sells thousands of cars, and on average it sells cars for hundreds of thousands of dollars each, and raises prices each year. Because Ferrari competes on the merits of its brand, it is able to capture much higher profit margins than your typical car company.
The company’s business strategy and financial profile more closely resemble exclusive luxury products companies such as Louis Vuitton owner LVMH. At the very high end of luxury, customer demand is fairly consistent even during economic downturns.
During the last global recession in Y 2009, LVMH saw its revenue decline by less than 1%.
In Ferrari’s annual report, it notes that the same demand resiliency exists in the high end of the luxury-car market.
Ferrari produces a limited number of cars each year, and puts customers on a waiting list that can take as long as 2 years. Some models can only be bought by invitation.
The order backlog guarantees a certain level of revenue growth in future years. And it gives the company the ability to forecast its business in the medium term, since it can count on a certain level of sales from year to year.
Furthermore, production models tend to sell out quickly. Last year’s 488 Pista model sold out fast, leading former CEO Sergio Marchionne to joke that people were begging to be placed on the waiting list.
The iconic Italian company increases the number of cars it produces each year to accommodate growing demand, but it balances increased production with price increases to maximize its revenue growth.
Ferrari could sell many more units if it lifted its production cap. but the company’s strategy is to keep its brand exclusive and keep its clienti excited.
Since its inception Ferrari has cultivated a special space in popular culture. Known for its superior Italian design, Italian engines that win F1 and other races, its brand is so desirable that the company has licensed it to a theme park and a chain of retail stores selling Ferrari-branded apparel.
As genius as the company’s engineering is, its business model, which limits production to maintain exclusivity and ever-increasing prices.
The company’s business model and brand strength will keep it in high demand through an economic downturn.
If investors get confused and treat Ferrari’s stock like that of a cyclical auto company during the next market panic, that could be a good opportunity to make an investment in a very strong business.
Enzo Ferrari’s iconic Italian Supercar manufacturer claimed the title according to the latest Brand Finance Global 500 2019 report launched at the World Economic Forum in Davos.
HeffX-LTN overall technical outlook for RACE is Neutral to Bullish, overhead resistance is at 158.93, and support at 154.44, some Key indicators are still flashing Bearish in here. Ferrari finished at 158.11, +1.52 Wednesday in NY.
Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term investment, and I see it at 200/share in that frame.
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