Has Ferrari Lost Its Mind?

0:01Travis Hoium:Can Ferrari go all electric? Motley Fool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Matt Frankel. And guys, one of the big items over the weekend that I think we got to start with is Ferrari introducing their all electric Luce, if I'm saying that correctly. I have a pizza Luce down the street from me. Probably not related. But this is something that we've seen at least the guts of. Johnny Ives' company, Love From, designed some of the internals. So we saw a little bit of that, but we actually saw the outside. The reaction from the media, from influencers and people like that, Matt, was not all that positive.

0:49Travis Hoium:So what do you think about Ferrari making this step into the EV space? I mean, I could have told you before they made this product announcement that the market was going to react negatively because it's going to be really tough for Ferrari to differentiate itself in the EV space. The company's own executives seem to think that this is the future of the company and I don't buy it. People buy Ferraris for specific reasons. One, they sound different than every other car on the road. They have race car-like handling, which is almost impossible with an EV because your batteries weigh 2 ,000 pounds.

1:21I mean, there's a lot. People who buy Ferraris don't care about being able to drive 3 000 miles in a clip the average ferrari goes about 2 000 miles a year um you know or being

1:31Travis Hoium:able to they're not actually for driving as much as they're probably very fun to drive i've driven one once but uh they are more of kind of a showcase than anything else yeah i think i was there when you drove your ferrari uh yes that's right uh and being able to carry five passengers in their luggage no one buys a ferrari for that especially a 600 000 upscale version uh and with evs being able to do zero to 60 in two and a half seconds is not a differentiator. You could do that with a Tesla Model S Plaid for one fifth of the price, less if you buy when used. It's not as much of a differentiator as it is when you're buying a sports car.

2:07A Ferrari sports car is noticeably faster than a Camaro. It's not noticeably faster than my wife's Cadillac EV because it has instant power delivery. So I feel like the market's reaction is correct in that the EV focus is a bit of a misstep for for the ferrari for ferrari i mean the companies the plug-in hybrid they released uh not long ago was a big success uh and i think that's really the direction they're

2:30Travis Hoium:going to end up going yeah lou what's so interesting about this is the design is so different than most ferraris and we've seen this before if you remember porsche when they came out with their suvs that was actually a huge success for them financially that arguably saved the company. But this one almost seems to go a little further in that direction. I said in our show notes that it reminds me of Apple's unapologetically plastic iPhones. It kind of has that sheen to it. So it just seems like it's so far off that that's what's throwing people off. That all said, I still kind of like it. Yeah.

3:06Lou Whiteman:You know, Matt, Matt's all this reaction coming. I didn't because Because to be honest, I'm surprised investors care. This to me feels like a placeholder. You're a European automaker. You're an automaker in general, but especially a European automaker. You have to have something in this segment, period. Just so the politicians don't bug you when you call them up. I don't think this is a needle mover. If they really want to move the needle, they should start fulfilling some of their wait list, which has been their problem. But look, I'm not going to say that there isn't a market for five passengers with luggage.

3:42Lou Whiteman:I wouldn't have thought the Porsche Cayenne would work either. There are people who will pay ridiculous amounts to brag about what they're really when they're just buying a Cayenne kind of looks like the Kia, if you ask me in a lot of ways. But, you know, so there is always a market out there for this, maybe. But for the most part, you know, they're not trying to differentiate there. They're not trying to do anything more than check the box, get something in this market, and then let it evolve from there. Ferrari's big differentiator is that they have the best-in-class margins. They don't lose money on new models.

4:17They do a great job of keeping demand just ahead of supply, even on all their new model launches. And like Lou said, they have a giant wait list for most of their models. And the Porsche Cayenne was not a$700 ,000 vehicle, is a big thing to point out. Much more mass market than Ferrari has ever been. Right. And I don't have the number in front of how much they spent developing this. But I think the investor reaction is that it won't produce the kind of margins that Ferraris used to, that they're not going to get the ROI on that spending that they do on like the plug-in hybrid, which sells for, I think, like$800 ,000 and has a long wait list.

4:54So that's really what we're seeing here, that they're not going to get the ROI on their spend. Not just the look of the vehicle, but just that they're not going to make their money back.

5:02Lou Whiteman:This is such a R &D intensive industry. And again, I don't know how they can avoid. I mean, nothing Matt said is wrong, but I think it misses just the reality. If you have to be doing something here and doing some of their terms, you know, I don't know if the market was surprised by this. I think the market's got better gripes with Ferrari right now than this. I'll just say that.

5:26Travis Hoium:Then maybe their F1 team did have a pretty good weekend, at least with Lewis Hamilton. And so maybe that's not something that they're griping about. Lou, Mercedes also came out with a concept that's not as close to production as it seems like the Luce is. But is that something that it's not quite as off the kind of traditional style of a Mercedes vehicle? Is that maybe going to be a little bit more successful? Or does that even matter? Is it just this placeholder that you need to kind of check the box and say you're involved in EVs, but you're not necessarily looking to sell a lot of these?

6:00Lou Whiteman:Kind of same answer, but I do think there's probably more opportunity for sales there just because of the nature of their customer. Look, I looked at that one, too, and that looked like my neighbor's Audi. I don't know how you really differentiated themselves anymore. And to be honest, you know what differentiated itself in the market was the Cybertruck. So maybe differentiating shouldn't be your number one goal. Look, of the two, I think the Mercedes can sell more, but I actually think Ferrari could turn theirs into a higher margin thing. 20 % or so of that high margin is customization. That has always been Ferrari's superpower.

6:40Lou Whiteman:They designed the Luce for that. if they can, you know, if the world moves towards EVs and they have at least a concept in place that they can get some of those Ferrari type customizations mods on, I think this could be a success. But no, I mean, again, I don't think you can invest on it today. I think you invest on whether or not they can fulfill their backlog.

7:00Travis Hoium:The people who are giving Ferrari flack today are probably also not the people who are going to be buying a Ferrari or making those customizations. The answer is going to be, who's the billionaire, the several hundred millionaire who was willing to drop, you know,$800 ,000, a million dollars on a new electric vehicle to differentiate themselves from the crowd? I think those people will be out there. When we come back, we're going to turn ourselves to why the market is up today. And that has to do with Iran. You're listening to Motley Fool, Hidden Gems Investing.

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8:44Travis Hoium:Lou, the reaction is due to a new piece ish deal in the Middle East. It seems like we're going back and forth on this. on almost a daily basis, but the market continues to react. And so I wanted to get your thoughts on whether this is something, is this nothing, is the current situation where oil price is now$94 a barrel, at least WTI, that seems like it's going to continue to trickle its way through the economy. So how should investors be thinking about this kind of back and forth with the stock markets and the real data that's coming out that's showing that gas prices are high for longer than we expected and inflation may be a little bit sticky.

9:23Lou Whiteman:It seems like the difference this time is both sides seem to think that they're talking this time and previous announcements apiece, maybe we're more one sided. I do think we should wait and actually see what happens before we assume, but the market doesn't agree with me there. So the market is up on this assumption. It would help. It definitely would help. You've mentioned oil prices are trending down, but more importantly, what we've learned from this is oil prices don't matter so much as the refined products and the products that come out of oil, that's going to take time. Gas didn't spike up.

9:55Lou Whiteman:Gas has trickled up the last few months. I don't think there's any reason to think that it won't, that that same thing won't happen on the way down. There's plenty of unknowns here. Even if the strait is actually opened, we still need ship captains to test that the strait is open. I mean, look, we talk about this like a commodity. There are human beings about to sail through that. So it tends to open up slower. If the Red Sea is any guide, it tends to open up slower than what you think. How much damage was there to the infrastructure? Normalization on oil flows is going to take months, if not years.

10:33Lou Whiteman:I don't think the economic impact on reopening will happen any faster. An immediate knee-jerk reaction is what we might see if we get a deal. I'm just looking back when we had that two-week ceasefire deal that was announced in April. Oil prices crashed by about 16 % the next day. But lower and, quote, back to where we were are two very different things. As Lou mentioned, there are the numbers over 800 tankers that are stuck in the Strait of Hormuz that need to get moving. You know, supply chains, shipping routes, energy infrastructure, that's not just going to snap back overnight. Economists widely expect oil prices to stay above pre-war levels till the end of the year, even if a deal is reached.

11:16And same goes for inflation. I don't expect it to snap back to 2 % immediately. And not just because of energy prices. I mean, P-Steel is a positive catalyst for lower inflation, but it's not deflationary. So it's really important to differentiate between those two terms.

11:33Travis Hoium:Matt, this reminds me of when we talked about inflation coming out of COVID being transitory. And what do you do if you're the Fed, if inflation is transitory? It turns out it was kind of transitory, but that transitory lasted a while. It was not a, you know, spikes up for six months and then comes back down to where it was. I think it was like a two-year span. We raised interest rates tremendously. Is this what you would expect to see is, hey, yeah, maybe this is the beginning of the end of this conflict and the economic impacts, but we're going to be feeling this for quite a while. Yeah, I mean, I'm pretty sure Jerome Powell wishes he could take that word back, transitory when he said it.

12:14We still have not gotten back to the 2 % target, it's worth mentioning, even now. Inflation was the highest it's been since 2023 last month, and it's not just energy. There are other contributing factors as well. I mean, when we came into 2026, I thought tariff uncertainty was a thing of the past. And then, you know, boom, it just shot back up. So it's not just the energy price inflation. But no, I think it's going to take a little longer to cool off. I think the Fed's going to be a little bit more deliberate in acknowledging that it's going to take a little longer to cool off than they had been before.

12:49I still think over the next two years, the general direction of inflation and interest rates is lower, but it's going to be a much more steady and slow decline than a lot of people think.

13:00Lou Whiteman:Yeah, and maybe lower from the peak, but I don't. I question what the forces are that's going to really push, put pressure on rates and put pressure on inflation. I mean, wouldn't it be great, Travis, if we could just go back to talking about things like the deficit and stuff like that as driving things? But it is really, really hard to see the bond market believing that we are in a above average credibility market, even if all of these external factors go away overnight. I think more normalized inflation relative to the beginning of this decade should be expected. Is it down from the highs? Probably.

13:45Lou Whiteman:But we aren't going anywhere near the lows. And if anything, I think we should learn to live what we've had the first few months of the year. I think this is going to feel more normal than a few years ago.

13:57Travis Hoium:Yeah, and we are stock investors. But just a reminder that bond investors run about 10 times more money. The bond market is much, much bigger than the stock market. So it is important from time to time to listen to what they're telling us with what's going on with rates. And it seems like those expected rates are going higher, at least later this year. Something to keep an eye on for investors. When we come back, we're going to talk about a potential slowdown in AI spending from some of the big tech companies you're listening to. Motley Cool, Hidden Gems Investing.

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15:57Travis Hoium:But over the last few days, and particularly over the weekend, we got some indications from some pretty big names in artificial intelligence that maybe the payoff that they were looking for is not necessarily there. Matt, Uber, Valve, and Duolingo were three of the companies that have at least given us indications. I think Uber was kind of the most vocal, but indications that, hey, we're spending a lot of money on AI. We don't know that there's a real ROI there. So are we at a new phase where the token consumers, which are these companies, are questioning, hey, is there really a payback here? Yeah.

16:34And to be clear, if we see more CFOs and COOs start to question their AI spend, And that's a generally good thing. No one wants the companies they invest in to waste money. It's a good thing overall. Uber, just to kind of add a little bit of context, their COO, he publicly admitted that the company cannot show a clear connection between how much they're spending on AI tokens and how much value they're getting out of it. just the numbers. Uber has about 5 ,000 engineers, each of which are spending about five, between 500 and 200,$2 ,000 a month on AI tools, depending on what source you're looking at.

17:10I mean, that's millions of dollars a month with no clear payoff yet. And it's not, this is not to say we're in an AI spending bubble. It's the, the, the use cases for AI are different depending on what your business is. I mean, just for example, financial services, that's an area that I follow very closely. If you can use your AI tokens to automate document processing, to automate loan approvals, things that you would normally have to pay somebody to do, you can more clearly show an ROI on what you're doing. So there are applications in the retail space to automate certain processes, logistics space.

17:49So basically, if you can use your AI tokens to automate processes and reduce labor costs and show clearly what you're going to do with it. It's a much better use case than just to help write code and things like that that don't have a clear, immediate payoff. And that's what we're starting to see executives question.

18:14Travis Hoium:Yeah, Lou, we've also seen the word token maxing be something that people have talked about. When you put incentives in to say, hey, use more AI and maybe you'll get that promotion. Maybe you'll get a raise. The incentives, you know, show me the incentives. I'll show you the outcome. And maybe that outcome doesn't lead to a lot of ROI.

18:32Lou Whiteman:Yeah. Not everybody here can be right. And I don't think we know what part is wrong. And that sort of scares me as an investor. Matt's right. It might be that just this is a good tool for some things, but not everything. But we just had a company file an IPO saying their enterprise AI total addressable market is about two thirds of total US GDP. So again, something can't be right there. Or just AI has to get cheaper to kind of fulfill the goal.

19:05Travis Hoium:And we talked about this last week. It's actually getting more expensive. Tokens are getting more expensive.

19:09Lou Whiteman:Not only is it getting more expensive, but the AI hyperscalers are companies that have traditionally enjoyed a mid-teens return on invested capital. Right now, their return is negative. So they have to either figure out how, I mean, at some point, hopefully the buildout won't go on forever, but it is going to go on for a while. At some point, they're going to have to figure out how to, I don't know, 15X the revenue they are bringing in here somehow on the same cost basis. All of this can't be true. We can't have this just as kind of select, but not everything, but it's going to eat software. We can't have it.