Ferrari: The ROI Machine

Ticker: RACE | Price: $314 | Market Cap: ~$56B

There's a joke among Wall Street analysts: Ferrari doesn't sell cars—it sells permission slips for billionaires to wait two years for the privilege of spending €480,000. And somehow, that's the business model. What sounds like parody is actually one of the most elegant capital allocation machines in global equities.

Ferrari's Q1 2025 results confirmed what long-term shareholders already know: this isn't an automaker. It's a luxury brand that happens to make vehicles, and it operates more like Hermès than Honda. Operating margins hit 30.3%, net margins came in at 23%, and the order book now extends into 2027. In a world where legacy automakers are scrambling to survive EV disruption, Ferrari is raising prices by 10% because of tariffs—and customers are saying thank you.

Let's break down whether this Prancing Horse still has room to gallop.

The Numbers That Matter

Ferrari's Q1 2025 showed double-digit growth across nearly every metric despite shipping only 3,660 cars (up a mere 1%). Net revenues increased 13% to €1.79 billion. Operating profit surged 22.7% to €542 million. Diluted EPS came in at €2.30, up 18% year-over-year.

The magic here is pricing power. While most automakers fight for volume, Ferrari fights for exclusivity. Average selling price now exceeds €480,000 per vehicle. Personalizations alone contribute roughly 20% of car revenues—meaning customers are paying substantial premiums just to customize their Ferraris beyond the already astronomical base price.

Full-year 2024 delivered even more impressive results: net profit of €1.53 billion (up 21%), industrial free cash flow exceeding €1 billion for the first time, and an EBITDA margin of 38.3%. The company has now exceeded its 2026 profitability targets a full year early.

Why Nobody Can Copy This

Ferrari's moat is almost absurdly wide. It's not just brand recognition—plenty of companies have that. It's the deliberate scarcity model combined with pricing power that creates what Warren Buffett might call a "toll bridge" business.

Consider: Ferrari sells fewer than 14,000 cars annually. It could easily sell more—the waiting list proves demand far exceeds supply. But management refuses. By constraining production, Ferrari ensures residual values stay elevated, waiting lists remain multi-year affairs, and the brand retains its aspirational mystique. Over 70% of sales go to existing customers who have "earned" the right to buy another one.

The Formula 1 connection deepens the moat further. Racing isn't a marketing expense for Ferrari—it's the company's identity. The technology transfer from track to road creates genuine differentiation. The F80 supercar, unveiled recently, showcases direct racing DNA in its powertrain architecture.

Brand expansion into lifestyle, fashion, and experiences adds diversification without diluting the core. Theme parks in Abu Dhabi and Spain, museums in Maranello, and licensing agreements create revenue streams that compound the brand's global reach.

The ROIC Machine

Here's where Ferrari separates from the pack entirely. Return on invested capital currently stands at 22-24%, roughly double the WACC of ~9.5%. For context, most automakers struggle to generate returns that even match their cost of capital.

Ferrari operates like a capital-light luxury house. Production is deliberately constrained, so massive factory expansions aren't required. R&D spending runs at a healthy 13% of revenues, but it's focused on maintaining technological leadership rather than chasing scale. The result is a business that generates substantial free cash flow while requiring minimal incremental capital to grow.

The company's ROIC has expanded from roughly 18% five years ago to over 22% today. This isn't financial engineering—it's genuine operating improvement driven by richer product mix and expanding personalizations.

What's the Risk?

Valuation is the obvious concern. At roughly 35x trailing earnings and 32x forward, Ferrari trades at multiples that assume near-perfect execution. The five-year average P/E exceeds 47x, so current levels actually represent relative value—but "relative value for Ferrari" still means paying luxury prices.

The China weakness deserves attention. Shipments to mainland China, Hong Kong, and Taiwan declined 328 units in 2024. While management correctly notes that China represents a smaller portion of the business (roughly 8% of revenues), any extended softness in the world's luxury growth engine matters.

Electrification presents both opportunity and risk. Ferrari's first fully electric vehicle launches in 2025 with an innovative unveiling planned. Management has committed to a 2030 powertrain mix of 40% ICE, 40% hybrid, and 20% electric. Execution here is critical—Ferrari cannot afford to dilute its brand identity in the transition.

Tariffs introduced new uncertainty. Ferrari responded with selective price increases of up to 10% on certain models, passing costs to customers. The company confirmed 2025 guidance but acknowledged a potential 50 basis point margin impact. So far, demand appears unaffected.

Capital Allocation: Returning What They Can't Reinvest

Ferrari's €2 billion buyback program continues reducing share count systematically. Q1 2025 saw €424 million in repurchases, including participation in Exor's accelerated bookbuild offering. Net industrial debt stands at just €49 million as of March 2025.

The dividend yields roughly 0.9%—modest, but that's by design. Management prioritizes buybacks as the more tax-efficient capital return mechanism. Total shareholder distributions in 2024 reached €1 billion, essentially matching industrial free cash flow generation.

This is textbook capital allocation: reinvest where returns exceed cost of capital, return the rest to shareholders efficiently. Ferrari's modest reinvestment rate reflects the reality that massive growth capex would undermine the scarcity model.

Let’s Score

Overall Score: 67/100

Ferrari represents a rare breed: a business so differentiated that traditional competitive dynamics barely apply. The question isn't whether the moat is wide—it clearly is. The question is how much you're willing to pay for it.

At $314, you're buying a company that compounds earnings at mid-teens rates with fortress-like returns on capital. But the multiple already reflects this quality. The reverse DCF implies the market expects 8-10% earnings growth essentially forever—achievable, but leaving minimal margin for error.

For long-term compounders willing to pay up for quality, Ferrari remains one of the cleanest business models in public markets. Just don't expect to find it on sale. Some things stay expensive because they deserve to. The business quality is undeniable. We own RACE and will gladly add on dips. Would you like to stay ahead of opportunities like this? Join our community where we share real-time trade alerts and deep-dive analyses of businesses with true competitive advantages. Don't just trade the market - invest in excellence.

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