Ferrari: racing through time

As with any investment, your capital is at risk.

Ferrari is one of the best luxury brands on the planet. It is perhaps the best brand of any sort. The company is responsible for designing, engineering and producing the world's most recognisable sports cars. It is hard to overstate Ferrari's grip on the automotive imagination. As its eponymous founder, Enzo Ferrari, said, “Ask a child to draw a car, and certainly they will draw it red.” Enzo had little formal education and was not an engineer. Instead, he described himself as ‘an agitator of men’. A mercurial character, he rarely left Maranello and devoted his life to the pursuit of excellence for Ferrari. He was, undoubtedly, a genius marketer. There are several anecdotes of him making high-profile clients wait months for a car, even when there was plenty of inventory, just to maintain their allure.

The Ferrari brand owes a lot to its fabled founder, whose biographer wrote, "In Italy, there was the Pope, and then there was Enzo." He was a racer from the beginning – an Alfa Romeo driver since 1924 who formed his own team, Scuderia Ferrari, in Modena in 1929 to race Alfa Romeo cars. The first Ferrari badged road cars didn't appear until 1947 when Enzo himself was nearly 50 years old.

Fast forward to 2023, and Ferrari’s net revenue came in at just under €6bn. About 90 per cent of revenue comes from selling cars, engines, and parts, with the remainder from racing sponsorship and the lifestyle business. Ferrari’s operating margin is approaching 30 per cent, which is incredible for a car company.

Ferrari manufacturing is an artisanal process. The production line is not automated and is lit with natural light. Investment Manager Brian Lum described his experience witnessing Ferrari engineers laying out exhaust manifolds, meticulously spacing the pipes like a musical instrument to ensure that the harmonies produced by the car in motion sound correct.

At its Maranello headquarters, a department is dedicated to maintaining the archive of all Ferraris ever made. Vintage Ferraris appreciate more like artwork than automotives. In fact, of the top 30 most expensive cars ever sold in auction, Ferrari dominates the list. There is no substitute for the heritage, the glamour, and the craftmanship associated with Ferrari. These, coupled with its founder's remarkable character, are insurmountable assets to the brand.

At Baillie Gifford, we are fortunate to have been a shareholder of Ferrari since 2012, initially through our holding in the Fiat Group. The Fiat Group acquired a stake in Ferrari in 1969 and increased its stake to 90 per cent following the death of Enzo Ferrari, whose son, Piero, held the remaining 10 per cent.

In 2012, financial markets were concerned by Italy's national finances and the Eurozone crisis and largely ignored the operational improvements underway at Fiat. By contrast, we were optimistic about the management team's steps to improve Fiat's mass-market, and we regarded Ferrari as an extremely valuable and under-appreciated asset. Ferrari became an independent, publicly traded company following its separation from Fiat in January 2016.

So, how can the company continue to deliver exceptional growth when, ultimately, nobody needs a Ferrari?

Since production began in 1947, the company has produced fewer than 250,000 cars – that’s less than Porsche sells in a year. Scarcity is critical to maintaining the Ferrari brand’s value. This is something that the company is expertly managing. We estimate it could sell double the number of cars it currently produces but chooses not to.

It is limiting to think about future growth as the number of cars produced multiplied by the average price of each unit sold (albeit we expect stable increases to both over the long term). Instead, we believe Ferrari’s potential lies in its ability to leverage the lifetime value of a Ferrari ‘collector’ – the name Ferrari gives to its most loyal customers.

Two-thirds of new cars delivered in 2022 were bought by existing Ferrari clients. And more than half of those clients already owned multiple Ferraris. These extraordinary numbers illustrate the strength of the brand and the loyalty it commands.

Ferrari operates in a sub-category of luxury where the core business is sustained by ultra-high net worth individuals, not simply the affluent, with different implications for brand longevity and vulnerability to recessionary pressure. Despite recent economic uncertainty, Ferrari has continued to produce strong operational results and demonstrated no let-up in demand. Its cars are sold out until 2026. Ferrari's antifragile characteristics, which the best luxury brands share, have been reflected in its ability to continue to compound despite the economic backdrop.

Bespoke orders and personalisation play an increasingly large part in Ferrari’s business. The company has rules for saying no to unsuitable personalisation requests, enforces post-purchase guidelines, and recently banned a celebrity for violating them. Ferrari has remarkable order book visibility, but personalisation is the last aspect a buyer decides, introducing an element of potential surprise in revenue that the market may be overlooking.

Key to ongoing success will be the company’s ability to maintain its brand and legacy while adapting to new technologies and customer demands. We’ve discussed the opportunity of increasing the lifetime value of collectors, but bringing in new collectors is imperative to the long-term case.

Formula 1 is a big part of that. Ferrari remains the most successful and the only ever-present team on the F1 grid. F1 attracts a younger audience and is the only advertising the company does, so success on the track may prove important. Lewis Hamilton joining the team is an exciting development from both a competitive and brand perspective.

Beyond this, the primary marketing tool is other collectors. Ferrari’s Board, which includes executives from Apple, Chanel, and Christian Dior, sets the strategy of choosing between collectors. Who should get the new special edition car – a senior collector or a new enthusiast? Today, around 40 per cent of new Ferrari customers are under 40.

On the technology side, Ferrari has offered hybrid cars since 2013. They have four models, and hybrid deliveries surpassed traditional supercar deliveries for the first time in Q3 2023. Ferrari is on track to unveil its first electric vehicle (EV) in 2025, designed and assembled in its new ‘e-building’, which is under construction in Maranello. By 2030, the company aims to sell 40 per cent electric, 40 per cent hybrid, and 20 per cent petrol cars.

However, turning Ferraris fully electric may not make total sense from an environmental perspective. It takes more energy to make an EV than an internal combustion engine car, and only over the course of the EV’s life do you make back the energy efficiency. But the average Ferrari only gets driven around 2,000 miles a year, so an electric Ferrari may never regain the energy used to build it.

Autonomous driving is another megatrend that car companies face. Over the very long term, the basic concept of owning a car might also be disrupted. However, it is essential to remember that we don't view Ferrari as a car company, but rather as a luxury company. Having the whole car industry become more about utility might create space for ever more creative high-end products.

Consider the watch market, a centuries-old industry that has undergone multiple disruptions. It is difficult to imagine competing with a smartwatch on utility alone. Yet some of the most successful luxury brands in the world are watchmakers handcrafting intricate and unique mechanical movements. The value lies in the complexity and artistry rather than the function. This is what luxury is about, and the lens through which we view Ferrari’s future and its potential to remain a luxury icon for generations.

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This communication was produced and approved in April 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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