In 2019 the luxury car market was valued at $500bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an experience and that category is projected to grow at an even higher rate.

One good thing of a luxury goods company is it is a price maker. Ferrari can increase the price of their cars by about 4-7% per year and still reach strong demand.

Special cars have historically been about 2% of sales but they will become a larger part of the business. By 2023 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars - sell for more than 1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased, EBITDA margins for the whole group could increase from 33% to 38%.

Another important thing of a luxury goods player is careful management of supply. Current product capacity is about 16000 cars per year yet only 9000 are made. In comparison, Porsche sells 25000 to 30000 911s per year. Ferrari could increase production to 16000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years. That’s a lot more than in the past. It takes about 40 months to produce and launch a new car.

2 potential risks to the Ferrari growth thesis:

Luxury goods companies with a similar financial profile to Ferrari have an average P/E 25. If you put Ferrari on that multiple it implies 60% upside. Valuing Ferrari by its cashflows implies a growth requirement of 3.5/4% per year, yet it has been growing its top line at 10% per year for the past 20 years.

There is room for further sales. Ferrari have sold almost no cars in China. Surprisingly the embedded fleet in China is less than 500 cars.