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Tesla’s production hit 1.85m vehicles in 2023 against Ferrari’s 13 660. Both produce cars, and both are pricey – but for very different reasons. From Moneyweb.

Neither Ferrari nor Tesla are cheap and while waiting for a price drop may work in Tesla’s case, Ferrari has seldom given investors that opportunity. Image: Krisztian Bocsi/Bloomberg

You can’t drive a Tesla in South Africa, but you can own the stock. The question is: should you? More on that in a bit.

Then there’s Ferrari, a brand that has attracted a fiercely loyal following since its founding in 1939. You can purchase Ferrari vehicles in SA, but at a price only the top 1-2% of earners can afford. For those who cannot afford this, you can invest in Ferrari stock since the company was listed in 2015 on the New York and Milan stock exchanges. Again, should you?

Read: ‘Magnificent 7’ now the ‘Gang of Four’

James Bennett, global equity analyst at Anchor Capital, addressed this at an investor presentation on Wednesday. The two companies, it turns out, are worlds apart in their business strategies, with Tesla cranking out a massive 1.85 million cars in 2023 (2022: 1.37 million) against a relatively minuscule 13 660 for Ferrari. Both companies are trading at one-year forward price-earnings multiples of around 50, so neither is on the cheap side.

The charts below show Tesla’s share price performance over five years against Ferrari’s.

Tesla share price

Ferrari share price

“Ferrari stock has never given investors much of a second chance,” notes Bennett, adding that the company has the hallmarks of an ultra-high-quality luxury goods company rather than an auto manufacturer.

Ferrari’s gross margins are a whopping 50.7%, compared to 17.4% for Tesla. Clearly, we are not comparing like with like. Ferrari operates in the luxury brand space and is less concerned with pumping out volumes than it is about preserving brand value (though production volumes have more than doubled since listing in 2015).

Tesla is determined to dominate the electric vehicle (EV) space and all that comes after it – fully autonomous driving, robotics, battery storage and other new technologies.

There are those who predict Tesla will ultimately become the world’s most valuable company.

Others see it as grossly overpriced, considering its market cap of $511 billion is nearly double that of Toyota, which produced more than 10 million vehicles in 2023 – more than five times that of Tesla. Ferrari’s market cap is about $75 billion, a fraction of Tesla’s.

A good luxury goods business, such as Ferrari, never discounts its prices, says Bennett. This is one of the benefits of the so-called Lindy effect, which says the longer a brand or an idea has been around, the longer it is likely to survive.

Ferraris are known to hold their value – even appreciating as they leave the factory floor, particularly for limited editions – which is one reason they are seen as a rand hedge in SA.

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Ferrari has sold less cars in its entire existence than Porsche sells in a year. It’s a great business when you can confidently tell investors that your entire production has been sold out for the next two years, as Ferrari is able to do.

Are EVs a threat to Ferrari?

Are EVs a threat? Not really. Ferraris are sold in tiny quantities and have low utility value compared to Tesla. The average Ferrari is driven around 8 000km a year, and the company has adjusted its business model so that 50% of vehicles sold are fuel-electric hybrids.

The first fully electric Ferrari will be produced in 2025, and the company plans to have 40% of all cars sold to be fully electric by 2030.

This coincides with the EU’s plan to ban the sale of petrol and diesel cars by 2035, though many believe this will not happen and will have to be pushed out. Both Porsche and Ferrari are investing in synthetic fuels that could extend the life of internal combustion engines.

Tesla to come back strong in next EV cycle

Tesla, like bitcoin, rewarded those who got in early. Five years ago, the stock traded at $15. Then Covid hit in 2020, and the stock roared up to $400 by late 2021 before surrendering more than half those gains in the last two years.

The reasons for Tesla’s stretched valuation have much to do with the earnings outlook beyond EVs, notwithstanding the company’s decision to pay off 10% of its staff.

“Although Tesla is taking strain, its competitive positioning in EVs has improved materially outside China,” says Bennett. “The whole EV market is taking strain,” which could weed out some of the peripheral players in the space, meaning Tesla will come back strong during the next EV cycle.

As Tesla CEO Elon Musk put it in 2022: “Can you imagine if a company was doing 25%-30% gross margins, but suddenly that same thing was five times more valuable? What would that do to the value of Tesla and the value of that car? It boggles the mind, actually. So if you think of the net present value of future cash flows, if you actually do the math of that, it’s insane.”

Head-start in full self-driving

Tesla has a huge head-start in full self-driving (FSD) vehicles and recently passed the one billion miles mark for FSD by making demos on new car sales mandatory. It also reduced its FSD monthly subscription by 50% to $99 from $199.

The company plans to unveil its long-awaited Robotaxi (with no steering wheel) in August 2024, though the commercialisation of this project may still be some way off, given the legal, regulatory and ethical challenges.

Autonomous self-driving will likely be a winner-takes-all event with high software margins for the winners, with Tesla way out in front.

Then there’s the question of energy efficiency. Some 80% of internal combustion energy is wasted on heat and parasitic auxiliary components, against around 20% for EVs – a figure that drops even further with regenerative braking.

Bennett says anyone waiting for Tesla to reach $120 (it was trading at $160 on Wednesday) is valuing the EV business only, not the future earnings drivers such as FSD, battery storage and robotics.

ReadVehicles: How could this possibly be an investment?

Tesla expects to produce more than 2.2 million units in 2024, while Ferrari’s numbers will increase only marginally. It will continue to make out-sized profits on this relatively modest production run, with vehicle customisation making an ever-increasing contribution to earnings.

Neither Ferrari nor Tesla are cheap, and that complicates the investment case for both. Waiting for a price drop may work in the case of Tesla, but Ferrari has seldom given investors that opportunity.