When it comes to Ferrari (NYSE: RACE) the business, or the racing heritage, there isn’t much weakness to find in its operations. The company generates ridiculous margins for the auto industry, like other luxury businesses is recession resilient, and even boasts a near $4 million vehicle that’s already sold out. One small weakness for the company has been its results in China – but that could be changing soon.
China is challenging
Ferrari isn’t alone in facing pain in China’s automotive market. In fact, it’s faring far better than its western peers as it has purposely limited its sales in China to roughly 10% of its total. Meanwhile, peers are struggling with massive sales declines amid a brutal price war in the country. That said, Ferrari’s sales in China have hit a speed bump as well and fell 25% during the first quarter to their lowest in nearly four years. Part of that was a shrinking China luxury car market last year due to a broader economic downturn, and weak consumer sentiment and spending.
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In a way, Ferrari is merely attempting to adapt to the prevailing trend in China that has been a boom and focus on electric vehicles (EVs). That’s right, Ferrari is looking to roll out its first fully electric supercar — don’t forget that Ferrari already does roughly half its sales in hybrids — in hopes of reviving sales in China.
Not only will Ferrari benefit from China’s rising EV market, but it will also benefit from lower tariffs and taxes. The vehicle, dubbed Elettrica, that Ferrari plans to unveil in October is expected to be taxed at a compound rate of 30% of its manufacturer’s suggested retail price, which compares favorably to its vehicles equipped with 12-cylinder engines that can be taxed at nearly four times that rate.
Pathway to growth
Make no mistake, this will be a big launch for Ferrari, which will launch the EV through a three-step process. Ferrari will show the “technological heart” of the new EV at its capital markets day on Oct. 9, per CEO Benedetto Vigna on the company’s first-quarter earnings call. Then the world premiere takes place during the spring of 2026, with sales launching that following October.
Further, while Ferrari historically limits its sales in China to around 10% of its total, that cap could rise with a potentially more profitable EV due to lower tariffs and taxes. That could mean more growth for a company that always makes sure it has more demand than supply and keeps a lid on sales.
Ferrari’s F80. Image source: Ferrari.
It’s not the only near-term avenue for growth, either. In fact, Ferrari’s upcoming $3.8 million F80 could deliver a significant earnings boost that could help its shares gain another 30%, according to Barron’s. The super-luxury vehicle is an example of just how strong the company’s pricing power is. Anthony Dick, who covers the automotive market for Paris-based private bank and asset manager ODDO BHF, told Barron‘s that the vehicle’s margins could be high enough to generate 20% of company profit from just 2% of units sold.
What it all means
Ferrari has emerged as not only a top automotive stock, but one of the best-performing stocks over the past few years. Its share gains have trounced the broader S&P 500 index, gaining 158% over the past three years compared to the S&P 500’s 47% gain. It has products people dream of owning, incredible margins, impressive pricing power, and best of all, room for growth.
If the company’s first fully electric EV is a hit in China, and potentially more profitable, it would be another huge win for the company that seems to keep winning.
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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
