The luxury goods sector is rapidly growing after a stagnation during the pandemic. According to Bain & Company, in 2021 the luxury market is expected to recover 50% of the profit loss during 2020 and returning to pre-pandemic levels by the end of 2022 or early 2023. Over the long term, the market for personal luxury goods is expected to reach $1.5 trillion by 2025, growing at 10% per annum between 2020 and 2025. Over the last decade, the total return from the stocks in the S&P Global Luxury Index is 13.7% a year, compared to 10.4% for the S&P Global 1200.
Within the luxury sector, high-end cars are the top-selling category worldwide. According to Mordor Intelligence, the global luxury-car market was valued at around $410 billion in 2020 and is projected to grow to $566 billion in 2026. Allied Market Research holds an even more bullish view, estimating a $733.2 billion value by 2026.
The market for luxury cars is massive and has a substantial growth potential thanks to the significant increase in high and ultra-high net worth individuals (HNWI and UHNWI). During 2020-2021, the wealth of the world’s billionaires jumped to $12.39 trillion, a 54% YoY growth, according to Forbes. In 2020, the number of millionaires also increased by 5.2 million to 56.1 million globally, according to Credit Suisse. Going forward: the HNWI and UHNWI population is forecast to grow at 5% annually through 2024, per Global Data Wealth Insight.
Looking at the long runway, the emerging trend of electric-luxury vehicles across the regions is fueling the demand for luxury cars. EV sales increased by 168% in 1H 2021 to 2.65 million units compared to the same period last year. According to Canalys, there will be roughly 33 million EVs sold in 2030, more than 10 times the 3.1 million EVs sold in 2020. Cathie Wood expects an 82% CAGR for EVs during the next five years, to 40 million. The International Energy Agency believes that there will be 145 million EVs on road by 2030.
Another noteworthy trend is Asia-Pacific’s leading position in the luxury automobile market. Currently, China is the largest automobile market worldwide, and has the greatest growth potential in the luxury-car market. According to the China Automobile Dealers Association, the country’s luxury car dealers sold 340,000 vehicles in November 2020 alone, an 11.1% YoY growth. According to Mordor Intelligence, the Chinese luxury car market was valued at $160 billion in 2020, and is expected to reach $260 billion by 2026.
China is also the world’s largest country and fastest-growing market to adopt electrified transportation. Sales of battery-powered/plug-in passenger vehicles have exploded in the last five years with China leading EV adoption in absolute and relative terms. More than 3.2 million EVs were sold in 2020 globally and EVs took a market share of 4.2% last year, up from 2.5% in 2019. China sold 1.79 million new EVs over the first eight months of this year, nearly tripling from 600,000 cars during the same period in 2020.
Within the luxury-car industry, Ferrari (RACE US, €229.60) maintains its position as one of the most prestigious and dominant players. Ferrari is among the world’s leading luxury automakers, which sets itself apart from peers due to a low-volume strategy to preserve exclusivity and a loyal, ultra-wealthy customer base.
Ferrari’s product offerings comprise four main pillars: the sports range, the GT range, special series and Icona, a line of modern cars inspired by their iconic cars. The current product range is comprised of six sports cars (SF90 Stradale, SF90 Spider, Ferrari F8 Tributo, Ferrari F8 Spider, 812 Superfast and 812 GTS), two GT cars (Ferrari Roma and Ferrari Portofino M) as well as two versions of their first Icona car, the Ferrari Monza SP1 and the Ferrari Monza SP2. Ferrari also produces limited edition hyper-cars and one-off cars as well as designing, sourcing and selling Ferrari-branded products through a network of physical and online stores.
In 2020, Ferrari increased their market share in the luxury performance car market to 25%, compared to 23% in 2019, with 31% of market share in the sports-car segment (25% in 2019) and 17% of market share in the GT segment (19% in 2019). Some of their biggest markets include EMEA (26% of 2020 market share), America (20%), Mainland China, Hongkong and Taiwan (19%) and the rest of APAC (36%).
Ferrari’s performance has shown an accelerating recovery post-pandemic. June 2021 witnessed a record car order. During 2Q2021, total shipments of 2,685 units almost doubled versus 2Q2020, and organic sales growth was a staggering 86% YoY, and a 7% growth compared to 2019. Ferrari’s EBITDA reached $445.6 million, with 37.4% EBITDA margin, 170bps above consensus, and up 550bps from 2019 level thanks to stronger mix. The majority of Ferrari’s revenue is attributed to sales from Cars and Spare Parts, which enjoyed a 101% YoY growth.
I believe that Ferrari will be able to reach $100 billion in market cap from these strategic advantages and growth drivers:
First, Ferrari’s electrification strategy is compliant with industry’s prospects, creating massive opportunities for growth. As with many other OEMs, Ferrari’s internal-combustion offerings will begin to phase out following a shift to an EV-production focus, and in 2025, the company will unveil its first fully-electric car. According to Morgan Stanley, tapping into the rapidly-growing EV market can lead to Ferrari achieving $23 billion in revenue, from selling 5,000 traditional internal combusting engine vehicles at an average price of $1.3 million and over 30,000 EVs at an average price point of around $475,000 in 2040.
Second, Ferrari’s expansion into the luxury SUV market creates strategic opportunities for growth. The launch of Purosangue—Ferrari’s first-ever SUV in 2022 will allow the company to reach an entirely new demographic: female and non-sports car enthusiasts, as well as penetrating the lucrative $160 billion Chinese luxury-automobile market. According to RBC Capital, the company will sell approximately 3,000 SUVs by 2023, equivalent to 60% of the incremental units. With 2023 SUV penetration reaching 59% in the US and around 42% in Europe and China, Ferrari is presented with a significant growth opportunity.
By 2025, Ferrari is estimated to reach $6.8 billion in revenue (11.2% CAGR from 2020-2025), $1.38 billion in net income (14.1% CAGR from 2020-2025) and a 45% ROIC, according to UBS Global Research.
According to management, competition in the luxury performance car market is concentrated in a fairly small number of players, including both large automotive companies that own luxury brands as well as small producers exclusively focused on luxury cars. Their main competitors are Rolls-Royce, Bentley, Aston Martin and Mercedes. From 2004 to 2020, Ferrari’s volumes have proven less volatile than competitors, due to its strategy of maintaining low volumes compared to demand, as well as the higher number of models in their range and more frequent product launches compared to peers.
As one of the most valuable brands in the world, Ferrari deserves the valuation of a luxury stock instead of a conventional automobile company. Ferrari is distinguishable from automobile peers due to: its limited-production volumes, causing demand to far outstrip supply, the “waiting list” for its product which enhances exclusivity, strong-pricing power and superior EBITDA margins, and a loyal, ultra-rich customer base. These features are commonly found in ultra-high-end luxury brands like Hermes and Cartier. Therefore, Ferrari should be valued at 15x 2022 EV/Sales like Hermes, versus its current 9x 2022 EV/Sales. For the long term, a $100 billion market cap is only 4.3x EV/Sales when Ferrari achieves the $23 billion in revenue mentioned above.
