One of the biggest stories from the stock market last week was the release of the new EV from Ferrari (NYSE:RACE). The stock dropped 5% on Tuesday (26 May) when it was unveiled. This compounds the fall in the past year, with the luxury carmaker down 29%. But is it now a cheap stock to consider buying?
Starting with the problems
Many (myself included) questioned whether Ferrari’s first fully electric model was a step too far from the brand’s heritage. The Luce’s design looks more like a luxury technology product than a traditional Ferrari.
However, the Luce launch only explains part of the share price weakness over the last year. It has more broadly been due to rethinking the firm’s growth prospects. Last year’s company presentation suggested revenue growth could slow to around 5% annually through 2030, a notable deceleration from the double-digit growth rates investors had become accustomed to. For a stock that had traded at a high valuation for years, any sign of slower growth was always likely to trigger a reset in expectations.
There are also broader concerns surrounding luxury electric vehicles. Rival manufacturers have delayed or scaled back EV programmes after seeing weaker-than-expected demand among wealthy buyers. Some investors fear Ferrari may be entering a market segment that simply lacks the enthusiasm needed to justify the investment.
A fall too far
Despite the fall, there are a few reasons why I think the stock could be cheap right now. To begin with, Ferrari remains one of the most profitable carmakers in the world, generating operating margins close to 30%. At $640,000, the Luce could be another car that can generate serious money for the company. As a potential shareholder, that’s what I ultimately care about.
Further, the Luce is only one model within a much broader product pipeline. The car is only likely to account for a small percentage of Ferrari’s overall sales, meaning the market may be exaggerating its long-term significance.
Based on the share price move, I think the market has reacted sharply and knee-jerked. When the dust settles, I believe the dip will be bought, as sentiment has been driven more by subjective opinions than by financial metrics. We can all have a view on whether we like the looks of a car, but that view is only really important to Ferrari’s target clients.
A balancing act
Of course, risks remain. A failed Luce launch could damage Ferrari’s carefully cultivated image, while a global economic slowdown could hit luxury spending. There’s also the possibility that electric Ferraris never achieve the desirability of their combustion-engine predecessors. But for long-term investors willing to accept some uncertainty, I think the recent sell-off may offer a good opportunity to buy close to 52-week lows.
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Jon Smith has no positions in the shares mentioned.
