Since 2016, Ferrari has delivered an impressive total return of 889.33%, translating to a remarkable CAGR of approximately 28.91%. At its peak, the total return soared to an astonishing 1,000% return.
Hi FluentInQuality, thank you so much for the article, it was an excellent read.
Like Bald, I have a question about your valuation as well.
In your reverse DCF you assume a terminal growth rate of 2.5%. Do you think this is reasonable? Why would it only be 2.5% for a luxury company? Look at Hermes, they are nearly 200 years old and currently growing in high single / low double digits.
What happens to your reverse DCF if you change the terminal growth to 6%, 8%, or 10%? It'd be an interesting exercise to see what the market is pricing in.
Putting the terminal value above 3% would, of course, have a severe impact on the valuation of the business. A terminal value above 3% would mean the business would grow faster than a country's average GDP. A 2% to 3% terminal value is the ''norm'' for developed economies. A terminal growth rate at or below GDP growth is conservative and realistic for mature industries with steady demand. For companies in emerging markets with GDP growth of 5–7%, a 3% rate may seem overly conservative but could still reflect eventual maturity.
Having terminal growth exceeding the average GDP is rarely possible, even with the most top-tier companies available for us to invest in. Using between 2% to 3% is a valuable sanity check.
If I assume a rate much higher than the long-term GDP growth, it implies the company will eventually outgrow the economy, which is, to me, an unrealistic assumption.
That's the problem with taking a 10 year defined period and then assuming a terminal rate thereafter; often times the business characteristics don't match the underlying assumptions that are required to make the model "fit".
I think it can grow above 2.5% from year 10 onwards. And yes, you are right, in that sustained long enough this will lead to a company larger than the market. If you think that the world is the TAM for Ferrari, then they'd have to over 1000x their market cap just to hit today's world GDP.
It's going to take many years growing at above world GDP rates before it'd require a reality check - eg even if it grows at 3% per year it's going to take over 80 years just to hit today's world GDP (~100 trillion), all while the world GDP would continue to grow too.
Correct. The terminal value should be somewhere between 2.5% and 3% for a more ''realistic'' outlook. At the end of the day, it all boils down to what someone will expect from what business and input metrics that the person finds ''reasonable'', but your comment did get me thinking, thank you for that! And thank you for your valuable input.
And add in: You find that Ferrari has a substantial amount of growth capex but you don't account for any capex driving growth (i.e. punishing growth investments). I suspect your wildly undercalculating the staying power and the amount of fcf Ferrari could generate if it stopped investing for growth.
Your fair price estimation would take Ferrari down to a NTM price to operational earnings of x19.6. Sounds like an extremely conservative multiple for an almost undisruptable company who's bound for margin improvement and strong and sustained earnings growth.
Thank you so much for your valuable input—I really appreciate your keen eye!
You're absolutely right, and I completely overlooked the impact of growth CapEx in my calculations. That was a big miss on my part, as it does penalize Ferrari for its growth investments. I'll make sure to rectify this in my next analysis with updated calculations to properly account for the distinction.
Thanks again for pointing this out—I always value insights that help refine my work!
Great analysis overall but I'm a bit confused by your DCF calculations.
Perhaps I'm missing something but didn't you calculate that the average growth rate from 2015-2023 was 21.37% but then claiming in your reverse DCF that 21% YOY growth for the next decade would be impossible?
I do believe that for the next two or three years, Ferrari might be able to grow its FCF by roughly 20% (currently growing at a 19% CAGR over 10 years), but inevitably, growth in FCF will slow down as the business matures and consumer/production cycles come and go. Therefore, a slower but more realistic growth rate of roughly 11% to 15% seems more reasonable for Ferrari over the long term.
The reverse DCF tells us that the current price has 21% YoY growth baked in (for the next 10 years), and this is something I highly doubt will happen for Ferrari. I'm convinced that FCF growth will slow down, keeping 21% growth seems unlikely to me.
I have always thought that way too but that's why I missed out on all of the tech greats who somehow managed to maintain insane YoY growth for well over a decade.
If Ferrari dips back into the 375€ region, I'll be buying - they have a ton of pricing power based on the brand.
Hi FluentInQuality, thank you so much for the article, it was an excellent read.
Like Bald, I have a question about your valuation as well.
In your reverse DCF you assume a terminal growth rate of 2.5%. Do you think this is reasonable? Why would it only be 2.5% for a luxury company? Look at Hermes, they are nearly 200 years old and currently growing in high single / low double digits.
What happens to your reverse DCF if you change the terminal growth to 6%, 8%, or 10%? It'd be an interesting exercise to see what the market is pricing in.
Hi, Trevor. Thank you for your input.
Putting the terminal value above 3% would, of course, have a severe impact on the valuation of the business. A terminal value above 3% would mean the business would grow faster than a country's average GDP. A 2% to 3% terminal value is the ''norm'' for developed economies. A terminal growth rate at or below GDP growth is conservative and realistic for mature industries with steady demand. For companies in emerging markets with GDP growth of 5–7%, a 3% rate may seem overly conservative but could still reflect eventual maturity.
Having terminal growth exceeding the average GDP is rarely possible, even with the most top-tier companies available for us to invest in. Using between 2% to 3% is a valuable sanity check.
If I assume a rate much higher than the long-term GDP growth, it implies the company will eventually outgrow the economy, which is, to me, an unrealistic assumption.
That's the problem with taking a 10 year defined period and then assuming a terminal rate thereafter; often times the business characteristics don't match the underlying assumptions that are required to make the model "fit".
I think it can grow above 2.5% from year 10 onwards. And yes, you are right, in that sustained long enough this will lead to a company larger than the market. If you think that the world is the TAM for Ferrari, then they'd have to over 1000x their market cap just to hit today's world GDP.
It's going to take many years growing at above world GDP rates before it'd require a reality check - eg even if it grows at 3% per year it's going to take over 80 years just to hit today's world GDP (~100 trillion), all while the world GDP would continue to grow too.
Correct. The terminal value should be somewhere between 2.5% and 3% for a more ''realistic'' outlook. At the end of the day, it all boils down to what someone will expect from what business and input metrics that the person finds ''reasonable'', but your comment did get me thinking, thank you for that! And thank you for your valuable input.
And add in: You find that Ferrari has a substantial amount of growth capex but you don't account for any capex driving growth (i.e. punishing growth investments). I suspect your wildly undercalculating the staying power and the amount of fcf Ferrari could generate if it stopped investing for growth.
Your fair price estimation would take Ferrari down to a NTM price to operational earnings of x19.6. Sounds like an extremely conservative multiple for an almost undisruptable company who's bound for margin improvement and strong and sustained earnings growth.
Hi Mathias,
Thank you so much for your valuable input—I really appreciate your keen eye!
You're absolutely right, and I completely overlooked the impact of growth CapEx in my calculations. That was a big miss on my part, as it does penalize Ferrari for its growth investments. I'll make sure to rectify this in my next analysis with updated calculations to properly account for the distinction.
Thanks again for pointing this out—I always value insights that help refine my work!
Great analysis overall but I'm a bit confused by your DCF calculations.
Perhaps I'm missing something but didn't you calculate that the average growth rate from 2015-2023 was 21.37% but then claiming in your reverse DCF that 21% YOY growth for the next decade would be impossible?
I do believe that for the next two or three years, Ferrari might be able to grow its FCF by roughly 20% (currently growing at a 19% CAGR over 10 years), but inevitably, growth in FCF will slow down as the business matures and consumer/production cycles come and go. Therefore, a slower but more realistic growth rate of roughly 11% to 15% seems more reasonable for Ferrari over the long term.
The reverse DCF tells us that the current price has 21% YoY growth baked in (for the next 10 years), and this is something I highly doubt will happen for Ferrari. I'm convinced that FCF growth will slow down, keeping 21% growth seems unlikely to me.
I have always thought that way too but that's why I missed out on all of the tech greats who somehow managed to maintain insane YoY growth for well over a decade.
If Ferrari dips back into the 375€ region, I'll be buying - they have a ton of pricing power based on the brand.