Catering to the rich is not always a good business plan because Ferrari’s revenues are declining.
In fact, revenues at Ferrari N.V. (NYSE: RACE) fell from $4.102 billion in 2017 to $3.931 billion in 2018, Stockrow estimates. Moreover, Ferrari’s revenue growth rate fell from 25.5% in 2017 to -4.16% in 2018. Thus, I calculate Ferrari’s revenue growth rate declined by a whopping 29.66% in 2018.
However, Ferrari is making more money. The auto legend’s net income grew from $642.73 million to $901.93 million in 2018. Meanwhile, Ferrari’s operating income grew from $936.19 million to $950.62 million. However, the gross profit fell from $2.12 billion to $2.066 billion in 2018.
Ferrari is Making More Money
Interestingly, Ferrari has more cash. In fact, Ferrari’s cash and equivalents grew from $777.56 million in 2017 to $912.26 million in December 2018.
Additionally, Ferrari’s short-term investments fell from $18.83 million in 2017 to $11.69 million in 2018. Therefore, Ferrari had $796.39 million in cash and short-term investments in 2017 and $923.95 million in 2018.
Furthermore, Ferrari’s cash flow is growing as its revenues fall. For instance, Ferrari reports a $573.3 million free cash flow for 2017 and a $729.37 million free cash flow in 2018. Plus, Ferrari’s operating cash flow grew from $795.68 million to $1.074 billion between 2017 and 2018.
Thus, selling to the rich pays off in one very important way. Rich people are more likely to pay in cash, which generates more cash flow even when sales fall. Hence, the classic Italian emphasis on luxury goods will pay off.
Is Ferrari’s customer base growing?
Luckily, the number of millionaires; and Ferrari’s potential customer base, is growing. In fact, the number of millionaires in the United States approaches the population of Sweden.
To clarify, the Spectrem Group estimates over 10.2 million US households had incomes between $1 million and $5 million in 2018, Bloomberg notes. In contrast Worldometers estimates Sweden had a population of 10.51 million in 2018.
More importantly, the number of Americans worth $1 million to $5 million grew by 2.5% in 2018, Bloomberg reports. Furthermore, the number of American households making between $5 million and $25 million grew by 0.6% or 173,000 in 2018.
Specifically, there were 1.4 million American households worth between $5 million and $25 million in December 2018. Consequently, Ferrarri’s potential customer base in the United States grew by 173,000 in 2018.
Plus, the rich have more money than ever before. Vox Recode estimates the average US billionaire had $6 billion in 2019. Thus the rich have more money to buy those Ferraris with.
How Far can Ferrari’s customer base grow?
Nor is it just the United States, where Ferrari’s market is growing. Quartz estimates India could have 950,000 millionaires by 2027.
Incredibly, Quartz predicts the number of millionaires in India could increase by 190% in less than a decade. To clarify, Quartz estimates there were 330,000 millionaires in India in 2017 but that number will grow to 950,000 by 2027.
Consequently, Ferrari will have more India customers soon. Notably, Indians already have plenty of money to spend at Ferrari dealers if they wish. In 2017, high net worth individuals held 48% of India’s wealth or $3.9 billion, Quartz calculates.
Thus, the rich are getting richer as income inequality grows worse. However, there will be roadblocks on the road to increased Ferrari sales.
Is Populism a Threat to Ferrari?
The same income inequality that drives Ferrari sales fuels growing resentment of the rich and populism. A 488 Spider makes a great target for gun-toting rich haters and grumpy traffic cops, for instance.
Moreover, there have been anti-rich riots in some countries. Most recently, the Yellow Vests have terrorized Paris; and other French cities, for 30 weekends in a row, Reuters reports. The Yellow Vests’ “protests” include smashing store windows and vandalism.
Obviously, those who smash shop windows will think nothing of taking a sledgehammer to an 812 Superfast. Nor are working class police; or security guards, likely to risk their lives to protect a billionaire’s California.
Under these circumstances, Ferraris could become a liability for those who can afford them. I do not think even the richest billionaire will like having to hire a platoon of mercenaries to protect him on his daily drive.
Is Ferrari a Value Investment?
I think Mr. Market overpriced Ferrari at the $162.21 it was trading at on 22 June 2019. Simply put, Ferrari does not make enough money to justify that stock price.
In addition, its annual dividend of 51.25₵ is low. In fact, Ferrari offered investors an annualized payout of 88₵, a dividend yield of 0.54%, and a payout ratio of 24% on 22 June 2019.
On the other hand, I could think Ferrari could be a good buy at a much lower price. Perhaps $54.04, so I advise wait until Ferrari drops below $60 to consider buying it.