Day one of Ferrari NV (NYSE:RACE)‘s life as a public company certainly went well. Shares of the ultra-premium auto manufacturer rallied 5.77% to close at $55 a share, giving the company a market capitalization of $10.39 billion. Given that everything is connected, what does Ferrari’s successful IPO mean for Tesla Motors Inc (NASDAQ:TSLA) and aspiring car company Apple Inc. (NASDAQ:AAPL)?
First a little about ourselves. We at Insider Monkey track hedge fund activity. Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 52 percentage points during the three years since the end of August 2012. These stocks returned a cumulative of 102% vs. 49% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
Given Tesla Motors Inc (NASDAQ:TSLA) sells vehicles to the same jet set as Ferrari does, Tesla Motors Inc (NASDAQ:TSLA) and Ferrari are similar in several key points. Both companies’ vehicles command premium prices. Both companies are demand-limited, with Ferrari limiting its annual sales to 7,000-7,255 to preserve exclusivity and Tesla Motors manufacturing 50,000-55,000 vehicles this year because it’s a relatively new company. Both companies were also founded by visionaries.
There are also some differences. Ferrari’s brand recognition and image is much higher than Tesla’s. Ferrari is profitable, while Tesla isn’t yet. According to SEC filings, Ferrari made 265 million euros in 2014, or about $300 million, while Tesla Motors doesn’t expect to be GAAP profitable until 2020. Because Tesla isn’t profitable and Ferrari is, Tesla’s car business isn’t worth as much as Ferrari’s based on traditional valuation metrics at the current time, although Tesla’s car business could certainly be worth much more if Elon Musk & Company execute in the future. Good execution isn’t guaranteed, however, and the smart money is sharply divided on whether Tesla can ultimately execute (Tesla is one of the most popular stocks that hedge funds have bought ‘Put’ protection against).
For the sake of comparison, given Tesla’s current $27.65 billion valuation, assuming Musk and Company executes well, but not lights-out-well, and Tesla’s car business is as valuable as Ferrari’s, the market is assigning a $17 billion valuation to Tesla’s battery storage and other businesses. This means Tesla’s stock isn’t really an automotive stock, it is an alternative energy or an energy storage company, which is what bond guru Jeff Gundlach has been saying all along. So for investors who are considering buying Tesla shares, the real question they should be asking is, “Is Tesla’s battery/energy storage business’ optionality worth $17 billion or more?”. Famed short-seller Jim Chanos, who is bearish on Tesla, agrees with Gundlach in a way. Chanos thinks Tesla is a good tech company, but not a good automotive company.
On the next page, we examine what Ferrari’s IPO means for Apple.
Ferrari’s IPO is sobering news for Apple Inc. (NASDAQ:AAPL), whose CEO recently said there will be ‘massive change’ coming to the auto industry in the coming years. Experts believe Apple Inc. (NASDAQ:AAPL) is working on a smart car that could come onto the market as early as the end of the decade. Apple has been aggressively poaching talent from Tesla and is rumored to have many of its top employees working on a next generation car product. For a company Apple’s size, the smart car is one of the rare product categories that could still move the revenue needle, although given Ferrari’s valuation, a successful ‘iCar’ might not increase Apple’s market capitalization by much. The luxury end of the vehicle market that Apple will presumably occupy isn’t worth very much relative to Apple’s market capitalization. Ferrari is worth $10.39 billion and BMW is worth $57 billion. Assuming Apple’s smart car division does as well as BMW and Ferrari combined, Apple would only be increasing its market capitalization by 10.4%. The car manufacturing business is simply too limited in the luxury end and too low margin in the mass segment end to make a big impact on Apple’s bottom line.
Ferrari NV (NYSE:RACE)’s successful IPO is certainly good news for Fiat Chrysler Automobiles NV (NYSE:FCAU), which still owns a significant chunk of the luxury company. If Ferrari stock rises, Fiat Chrysler’s book value will increase. Among Fiat Chrysler Automobiles NV (NYSE:FCAU)’s top shareholders and early believers is Mohnish Pabrai, which owned 13.2 million shares worth $200.52 million at the end of June, and his friend Guy Spier of Aquamarine Capital, which owned 2 million shares worth $25.95 million at the end of September.
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