2 reasons why Ferrari is expensive and still a stock to buy

Sophisticated investors learned long ago to buy stocks of exceptional companies, regardless of price. This notion helps you avoid trying to time the market and also allows you to buy a stock that looks expensive in case the price just continues to soar. Take You’re herewhich has made many investors incredibly wealthy and has always looked expensive by valuation metrics.

Coincidentally, although different from Tesla, another car stock that seems extremely expensive in the auto industry is still a buy: Ferrari (RACE -1.52%). Here are two reasons why it’s worth checking out.

How much does Ferrari cost?

Before we get to the rationale for Ferrari’s high valuation, the following chart shows how expensive it is compared to traditional automakers.

RACE PE ratio data by YCharts

If you are an investor interested in the automotive industry, a simple screen tool would bring up many automotive stocks that make Ferrari look exceptionally expensive. But that wouldn’t do the stock justice, and here’s why.

Incremental growth in new segments

Once upon a time, Ferrari management scoffed at the idea that the iconic racing and ultra-luxury car maker would venture into a segment like clunky, oversized SUVs. Until of course they figured out that they could put the Ferrari logo on a bigger vehicle and charge even higher prices. Go figure!

It took time to come up with the idea of ​​a Ferrari SUV, or to develop a vehicle comparable to “so-called crossovers and SUVs”, in Ferrari’s words. But just last week, the racing icon unveiled the Purosangue. It is the very first four-door, four-seater car in Ferrari history. And with a V12 engine and a top speed of over 190 mph, it sure won’t let you forget who made it.

Ferrari's Purosangue 2022.

Ferrari’s Purosangue 2022. Image source: Ferrari.

Ferrari’s entry into the SUV market could attract a whole new super-rich customer, especially given the staggering price tag of around $390,000. What many novice auto investors may not realize is that full-size SUVs and trucks drive a vast majority of the profits for traditional automakers.

Only time will tell if Ferrari sees a similar increase in profits, but it stands to reason that this new market entry will attract new customers, give existing customers an extra toy to buy, allow Ferrari to sell more vehicles as it traditionally keeps a lid on sales for exclusivity and pricing power, and potentially increasing margins even further.

And it’s a perfect transition to show another reason why Ferrari justifies its exorbitant valuation, compared to traditional automakers: eye-popping margins that continue to grow.

Leave competitors in the dust

RACE Operating Margin Chart (TTM)

RACE Operating Margin Data (TTM) by YCharts

Ferrari doesn’t get enough credit for its impressive margins in a capital-intensive manufacturing industry. Moreover, in such a developed industry, it has managed to constantly increase its margins compared to the competition.

Essentially, to do this, a company must possess a serious competitive advantage through protected or innovative technology. It must elevate its brand and the perceived value of its products, and it must avoid markdowns.

Ferrari accomplishes all of this well because it limits its number of sales, does not need to mark vehicles apart, and has an impeccable and powerful brand image with decades of racing heritage and ultra-luxury.

Ferrari’s stock is expensive and trades more like a luxury goods maker – and that’s how it should be viewed, compared to traditional automakers, even if that background doesn’t appear on your trading tool. stock filtering.

The finish line

Ultimately, if investors are savvy and buy stocks in companies that have sustainable competitive advantages, the stock price is less important. Ferrari has competitive advantages that traditional automakers simply can’t replicate anytime soon. This is evident with its margins already eclipsing other automakers as they continue to climb.

Will those margins be even more incredible in the years to come as the iconic race car manufacturer expands into broader vehicle segments? It’s very possible, and even if it doesn’t materialize, Ferrari is still an expensive stock that deserves investors’ attention.

Sallie R. Loera