Wall Street is getting one critical thing wrong on Ferrari (RACE)

Ferrari-F1

Morgan Stanley's Adam Jonas suggested that Ferrari could be shifting to all-electric vehicles in the future.
Ferrari investors, Jonas thinks, could be underestimating the costs of this shift.
Except that although Ferrari could produce some all-electric cars, it can never renounce its commitment to internal combustion — because racing runs on gas.

For years, Ferrari scoffed at electric cars. True, the Italian automaker added hybrid-electric technology to its stratospherically expensive LaFerrari hypercar.

But it wasn't until just before his untimely death last year that CEO Sergio Marchionne even hinted that Ferrari would go electric. It now seems likely that the prancing horse will at least take a crack at something all-electric, although the timetable is uncertain.

The hybrid-electric piece makes sense, as Ferrari's gas-chugging machines can't survive in a world of rising emissions and fuel economy standards imposed by governments.

This has led to some misperceptions, however. Ferrari has been pitted against Tesla — even though the former sells less than 10,000 cars annually, while the latter delivered almost 250,000 in 2018. Tesla also sells two sedans and an SUV, while Ferrari sells no sedans and has only just begun working on what it calls a "FUV."

More critically, analysts are leaping ahead to an all-electric Ferrari future. You can't entirely blame them, because under Marchionne and with a successful IPO in 2015, Ferrari indeed became more of a global luxury brand than it was before. The entire auto industry is chattering away about EVs, and Ferrari has been sucked into that conversation.

For some analysts, it's even a potential sticking point. In a research note published on Friday ahead of Ferrari's fourth-quarter and full-year earnings, Morgan Stanley's Adam Jonas — who has a "hold" rating and $140 target price on the stock, which is now trading around $110 — wrote, "[W]e think investors may be underestimating the up-front costs to transition to all-electric architectures."

Racing is everything for Ferrari

Ferrari 812 Superfast 5594

Jonas, for the record, is relatively bullish on Ferrari — shares are up 13% year-to-date — and thinks that investors should buy if the stock slides following any kind of downgraded guidance for 2019. (Jonas is also the most formidable Wall Street analyst when it comes to all things new in mobility and transportation).

The problem is that, unless Ferrari wants to create its own all-electric racing series, it can't transform its lineup being battery-powered.

Over and over and over and over again, Wall Street makes this mistake about Ferrari. Honestly, Jonas should know better. After all, this is the only publicly traded automaker that always discusses its Formula One results on quarterly earnings call. The point is that, ever since Enzo Ferrari opened his Scuderia Ferrari lo those many decades ago, Ferrari has been a racing brand first and a consumer brand second.

The company simply can't sever this defining link and run a racing program that's disconnected from the cars it sells to the public. And in many ways, I often point out, the whole reason for decades of road cars is that racing is expensive. The money to support the F1 team has to come from someplace.

Electric cars can be race cars — Formula E has been surprisingly successful. Hybrid-electric powertrains have also taken to the track. But serious all-electric racing is sort of impossible. In Formula E, the rapid depletion of batteries was solved by switching cars. That's going away, but flat-out running is still disappointing because Formula E cars are still slower than F1 cars.

Luckily, Ferrari doesn't even need to go all-in with electrification. It can ride the internal-combustion engine until it's literally the last one standing. If it has to charge people absurd sums to buy these cars ... well, it already charges absurd sums, and people stand in line to pay up.

Ferrari is, in a word, special. And that's what investors actually need to understand.

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