Conventional wisdom tells us that cars are terrible investments. They depreciate and cost a fortune to maintain. That’s true for almost all cars on the road.
When it comes to the exclusive world of supercars, however, the economics can look rather different. Though they hold value far better than your neighbour’s Polo, the real investment lies in the companies manufacturing these cars, provided you exclude the financial nightmare that is Aston Martin Lagonda (down 65% this year).
We shouldn’t judge an entire company by its share price performance, nor should we judge it based on recent Formula One (F1) race strategies. Ferrari has been so poor in recent races that it would be accused of match-fixing if it played cricket rather than raced cars. Interestingly, and perhaps reflecting this ongoing disappointment, the latest result from Ferrari (NYSE: RACE) reflects a more diversified base of sponsors for Scuderia Ferrari, with lower overall sponsorship revenue. Thankfully, it does sell a lot of road cars despite Charles Leclerc being given the wrong tyres for the umpteenth time.
Selling cars to enthusiasts (and footballers) with very deep pockets is a great business
This hasn’t stopped the share price coming under pressure this year, down about 18%. The entire industry has taken a knock, with issues like supply chain problems and inflation causing difficulties. Still, supercars offer remarkable resilience. Even in tough economic times, there are wealthy people who have spent decades dreaming of putting a Ferrari (or similar) in the garage.
It’s worth highlighting that in Volkswagen’s latest results, the company notes that the only brands in the group that grew or matched prior-year sales figures were Lamborghini and Bentley. Selling cars to enthusiasts (and footballers) with very deep pockets is a great business. To give an idea of exclusivity, Lamborghini and Bentley combined sold fewer than 10% of Porsche’s unit sales.
If you need further confirmation that Ferrari is ultimately a luxury goods and lifestyle company that happens to manufacture cars, then the appointment of its new chief brand officer should help you. Carla Liuni previously worked in senior marketing roles at Pandora and Bulgari. Those companies sell jewellery and fashion accessories, not supercars.
The real bull case
Speaking of sales, Ferrari achieved growth in shipments of 28.7% in the second quarter, and its revenues increased by 24.9%. The earnings before interest, tax, depreciation and amortisation (ebitda) margin came in at 34.6%, a number that reflects the power of this business.
Still, the pressures are there. On a six-month basis (a less volatile view than quarterly), revenue increased 21% and ebitda grew only 14%. This means that the ebitda margin deteriorated, in this case by 220 basis points from 37.3% to 35.1%. Though it is tempting to immediately blame this on inflation and supply chain issues, Ferrari mainly attributes this to a change in margin mix from fewer sales of special editions and higher sales of entry-level Ferraris.
Ferrari thrives on selling special editions and personalisation options that take the price from the Moon all the way to Mars. Though “special series” models only contributed 2% of shipments, they make a discernible difference to margin. That should tell you something about how much money Ferrari tends to make from the wealthiest people in the world.
The regional story is interesting too. Ferrari’s largest market is Europe, the Middle East and Africa (EMEA), not the US. EMEA accounts for 47% of shipments and grew at only 12% in the latest period. The Americas contribute a quarter of shipments. The most exciting growth story in this quarter was in mainland China, Hong Kong and Taiwan, with that region up a whopping 79%.
Lamborghini has a different regional exposure, with the US as its most important market, followed by mainland China, Hong Kong and Macau.
There are other interesting nuggets of information in Ferrari’s disclosures. Internal combustion engine models were 83% of total shipments in the latest quarter and hybrid models made up the rest. Cars and spare parts contributed 85% of revenue and the next largest was sponsorship, commercial and brand (which includes F1 earnings), with a 9% contribution to revenue. About 3% of revenue is derived from renting engines to other F1 teams and selling engines to Maserati, a contract that will expire in 2023.
Here’s the real bull case, though: Ferrari has made it this far without having an SUV. Deliveries of the Ferrari Purosangue will start in 2023. When you consider that 61% of Lamborghini’s unit sales are now Urus SUV models and that Porsche achieved sustainable commercial success through the Cayenne, perhaps the best is still to come.
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