Ferrari's Pricing Power Personified & The Chutzpah of Scarcity

0:00You know, after talking a few episodes ago with Andrew about Costco and him bringing up just how unique Costco is and how they built their retail company not like a retail company, I started wondering what other companies are out there that really think outside the box like that. And I stumbled on a car company that we all know probably grew up wishing we had one, and that's Ferrari. Ferrari is an amazing, amazing company, at least in my opinion. And they've really gone outside the box in how they've built their company. It's not really a car company at all. And we're going to dive into it and we're going to explain why.

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4:21Stephen:Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. So, I don't know if you've ever put any focus into something like this, Andrew. but whenever i started reading about ferrari reading their uh 20 what is it 20 20 the 20 f f there you go 20 f uh which uh for the if you don't know uh because ferrari is a foreign company that's being traded in the u.s they they report on a different form so their 10k is actually a 20 f um i did not know that until i started researching for it um and i couldn't find their 10k i'm like why can't i find their 10k so i had to do some google food um come to find out it's a 20f um so the more you know anyway uh when i started really digging into it it's the ferrari isn't a car company at all andrew it's more of a luxury brand it's a rolex with a v12 engine is really what it is and it blows my mind some of their numbers and i know you skimmed their 20f as well is there anything that just popped right off the page for you the second you started looking at it or did you have to really dig into it before you started to notice differences mine yeah i mean there are differences because i was skimming i just went to a random place so i didn't know that luxury american luxury i guess american is not the right word western luxury brands are really taking off in asia right now i guess there's a lot of a lot of wealth being built in some of these asian countries and so they're really they're really taking to the luxury brands like the luxury brands needed the extra nor nor the variety as it is but i just thought that was interesting for me personally because being somebody who follows starbucks and and apple and just knowing how in china the some of the um opposition to american brands again this is not an american brand but it's a western brand ferrari does not seem to be having those same struggles and if anything is growing in more demand and that's what's really interesting about the ferrari story is this story of demand for the brand absolutely i would say the the thing that popped directly to me is you know we we've talked about uh ford uh and you know on podcasts youtube videos you know we've covered the traditional automakers we've covered tesla um all that stuff and the ferrari is the exact opposite of all the other automakers in that it seems like all the other automakers are in a race to the bottom they're trying to produce as much as they can and sell as much as they can and ferrari is like nah that's a lot of busy work i think we'll i think we'll go the other way that's just too much effort when you look at the traditional uh auto market so for gm dodge what do you notice about operating procedures i mean then and if you really think about it they got to dig with uh unions right that that's a that's a big part of their bottom line they got to dig with uh the retirement packages, all that stuff.

8:10They got to dig with inventory, you know, and I don't think I've ever seen a Ferrari commercial. In fact, I've never seen a Ferrari commercial, uh, at all, but definitely haven't seen a Ferrari commercial where they were offering money back, uh, on your purchase. So, I mean, is there anything else that stands out to you, either positive or negative about the traditional auto manufacturers and their their profit margins and their operating bottom line you make a really good point and i think this is something that you

8:48Stephen:can expand as a mental model not just for the auto industry but for a lot of other industries and that makes it hard right uh brand does not equate to moat so i might like ford or you might like Chevy, just because we as individuals have an affinity for a brand doesn't mean that particular brand has a moat. And you're seeing this play out in this exact scenario where there's just like an endless supply of vehicles. And is that really the case? I go back to this phrase, as long as it gets me from point a to point b right there are some people who say that about their vehicles um is that what creates this commoditization of a car and um i think it's i think it's something to to unpack what do you think like why do you think there are so many mid cars out there that people can buy why why are we flooded with all these options What's your opinion?

9:53I mean, it's because they have to make money somehow. And, I mean, I don't, I guess I don't really know, but I would assume it's they have to make money somehow, so they just flood the market, whereas Ferrari has taken the exact opposite approach of, we're going to try to make sure there's one less Ferrari on the market than what is demanded.

10:26And I don't know, man. It just blows my mind that that has been successful. And I see why, because it's such a luxury brand. It's just, I don't know. Was it a calculated risk on their part? Did they know it was going to work? Like, that's just such a crazy concept. Is it not? Like, do you hear that? And you're like, oh, yeah, that's cool. Or does it seem super crazy to you as well? It does.

10:53Stephen:It breaks every preconceived notion you might have about running a business or creating a car company or whatever. And it takes a lot of chutzpah, for sure, to say, you know what, we're going to trust that by doing less, we're going to get more. It's bold. It's bold, God. Right. and so that is your word for the day chutzpah uh sponsored by ferrari not really we're not sponsored by ferrari but yeah chutzpah is definitely your word for the day what is the definition and spelling of chutzpah get out of here yeah here come on let me let me use words without being judged come on no judgment just it's been a long time since i've heard someone use use that word it's hilarious um the other thing that the and before we started recording uh brought we brought this up is that the ferrari it's a two-year wait list just about to to get your car so it's not only you know tesla has gone the route of making it super easy to get your car You literally order it on an app.

12:09It gets delivered. You don't even get car keys. You use the app to unlock it. So, I mean, they've gone the exact opposite route. And Ferrari's like, no, you're going to order it, and then you're going to wait for us to build it. I mean, again, just super, super bold strategy. but whenever on the reverse end i think seeing it work it's it's mind-blowing to me i think it's one of the coolest machines uh referring to their business model uh out there it's on paper it's one of those things i think on paper it shouldn't work but somehow they found a way to make it work

12:52Stephen:do you think how long do you think they could keep it up do you think it's easy to sustain they're hard to sustain that's the thing i think this is the more sustainable we've seen we've seen you know in 2020 i don't i don't have the the chart pulled up if do you have the chart pulled up still for operating margins yeah yep yep what did they what was it for 2020 20. So let's see, going back to 2013, they've step changed higher their operating margins. So just picking a few years out, 2018 was like 24%, 2022, 24%. And now they're at 29.5%. So a record, at least over the last, whatever this chart's looking at, what, 15 years, 11 years, 12 years, a record in operating margin.

13:47And by the way, you compare that to their competitors, 29 % operating margin versus less than five for Tesla, less than two for GM and four.

14:01Stephen:We don't even want to talk about that. That's a minus, almost minus five for Ford. So they're, they're not, they're not moving in the right direction. At least in the last year, they haven't. So completely different profit margin profile between them and your typical automaker. Yeah, and that was my point. I think it's much more sustainable what Ferrari has built versus we look at the traditional automakers, and they are, in some cases, struggling, and in Ford's case, severely hurting. and I don't think that I'm not saying that I'm predicting Ford's going to have to get bailed out again or anything like that it's just the that's the reality we have an oversaturated market inflation's too high the all the restrictions like everything is working against their favor right now so I mean it makes sense to me that they are struggling but at the same time Ferrari is not struggling and i i think it all goes back to ferrari's business model so can you give us some of the numbers on ferrari when you mentioned some of these numbers that kind of blew my mind a little bit because it's like wow these are in a completely different ballpark than someone like a ford in 2025 ferrari sold 13 640 units that is less than they sold in 2024 even though it was less they still went up in total revenue by seven percent to 7.1 billion and they're like you already mentioned their operating margin is 30 percent or just almost 30 percent which is absolutely nuts and this is the coolest the coolest thing i found in their 20f 20 % of their total revenue comes from custom paint, bespoke, I'm not sure what that is, some sort of stitching, and unique materials, whatever that is in the car.

16:22So 20 % of their total revenue comes from just customizing the car. That's crazy. That's freaking crazy, bro. Yeah, it's so cool. So when we start talking about the numbers, when we talk about the fact that they only produced 13 ,640 units in 2025, could you imagine the panic? And we won't even say a traditional car company drops to that number, just we'll say drops in that number. you know you know you know they dropped 13 000 units and all of a sudden wall street's freaking out so i mean it makes sense why why there are a lot of investors so high up on ferrari you mentioned they have one manufacturing plant yeah one manufacturing plant uh in italy they have 5 ,000, somewhere, don't quote me exactly on the number, it's like 5 ,100-ish employees, most of which are in Italy.

17:33I think they have around 30 worldwide, and those are going to be like your sales manager type, getting the contracts and getting the customizations and getting them back to the manufacturer.

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19:58Stephen:Save more than 50 % on term life insurance at selectquote.com slash beginners today to get started. That's selectquote.com slash beginners. I just made a new stock the third largest position in my portfolio. And I actually just finished the deep dive report on it called the Newtonian Compounder, How 60 % Returns Power on Unstoppable Machine. It's available for our Value Spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal once the stock hits$45. Check it out at einvestingforbeginners.com slash 60. so i think i think the key lesson in all of this andrew is i'm going to put this and stephen words words that stephen understands and that is they've prioritized a value over volume and that has garnered a massive amount of respect for their product and i mean it's and it's it's so funny because if you go to europe uh bmws mercedes they're like you know ford tourists they're freaking everywhere they're not crazy expensive but if you have a ford bronco in europe like you're balling like that's that's a luxury car but notably ferrari is one of the few european cars and i don't mean i mean you got lambos things like that but ferrari is is the pinnacle of no matter where i've been if you have a ferrari you're you're you're doing well we'll say right well the engineering also like you can't just manufacture this kind of scarcity and expect to continue it unless there's some underlying fundamental something underlying and fundamental that kind of anchors all of this so maybe for people who aren't car people like just how impressive is some of the engineering that goes into these vehicles and why is it considered such a improvement over my wife's toyota corolla hey man i like the corolla dude that's a great car it is a great car it is um a question for you though andrew well you talked about pricing power when we were talking about the fed um i think it was last episode and um well when you think about a car company that does 7.1 billion in total revenue their their uh revenue is going up even though they sold less units what and they create this scarcity well like what what can you break out of that or break down out of that uh from a pricing power perspective i mean yeah the it tells you if if volumes are down but the revenues are up there's a there's only a few ways you can you You can slice that.

23:12Stephen:And the easiest one, if everything else is the same, means you had pricing power. So bottom line, they're selling these cars at a higher price than they were the year before. And so like we were mentioning on the episode about the Fed, that gives them, that makes them one of those businesses that are resilient to inflation. And a business that sells to multimillionaires and billionaires, maybe that's quite obvious that they're inflation resistant. But it's still one of those metrics you can use that you can apply to any business. Not every business will report volume numbers. Not every business will report specifically on average selling price.

23:59Stephen:But if a business does report on volume, you can use those metrics and compare how they're moving from year to year and do exactly what we're doing now. You look at the top line, you look at those revenues and you compare it to the volumes. And it's a pretty clear signal that if revenues are up, even though volumes are down, they are flexing their pricing power. And one of the things that I get really, really excited about pricing power, and I was thinking about this in the context of Apple. Because if you think about an Apple phone, most normal people, like I would consider myself not normal because I don't look at like the payment.

24:39Stephen:I look at what's the total cost of something. I think most normal people look at the payment of an iPhone as a bill. It's like, okay, this is just part of my cell phone bill. so one of the things that tim cook said in their recent earnings call was uh he was asked about pricing using pricing as a lever to to help with more growth he was like hey we're not going to pull on that lever right now or in the near future so what that communicates to me is that they haven't even tapped all of that pricing potential like there's still a long way that that pricing potential could go. Charlie Munger called this Lollapalooza effect and he used Coca-Cola as an example.

25:19Stephen:When you're selling ounces of Coke and it's pennies, an extra penny or two is not going to make a huge difference to the consumer, but it's going to make a huge difference to a shareholder. And the fact that, okay, if it's just a couple of pennies, we have a lot of pennies we can go up before it starts to affect the consumer. Bringing that all back to Ferrari, talking about the pricing power if if you have a multi-millionaire billionaire high net worth individual buying a ferrari i don't know the answer to this because i am not in that camp but it's just interesting food for thought is there a big difference between say 330 000 and 390 000 if it's like i gotta get this vehicle i have to get the v12 i have to get whatever it is is there more flexibility in that pricing power?

26:11So you beg the question,

26:14Stephen:does Ferrari have untapped pricing power? And that's, I think, where pricing power gets most exciting because, yeah, we have businesses that have pricing power. They flex that price over time. But the really long-lasting businesses may have pricing power that they haven't fully tapped into yet. And that can give really, really long years of compounding potential which is what lazy investors like me would prefer to have in our portfolios. Absolutely. And to take it just one step further, Andrew, it's not even the car itself isn't even their only source. As we talked about, they get a lot of revenue from customizations.

27:03They also receive a significant amount of money from their Formula One sponsorships. A lot of this racing stuff, which I didn't know this until I was reading, but they actually rent their engines to Formula One. They are bought straight out. i think that's a super interesting strategy to rent the engines versus selling them directly i mean we were talking about costco like reinventing the wheel is not being a retailer being a subscription i mean that's almost what ferrari did with an engine like that is that's pretty pretty crazy but i mean at some point i feel like we have to stop looking at ferrari as a car company and just looking at it as a lifestyle luxury conglomerate it's it's not a car it's a it's a company that makes cars but there it seems to be there's so much more

28:09Stephen:and the numbers play play into that and they back it up i'll just throw a few out there real quick if you don't mind last three years in revenue revenues are up oh 12 a year if you look over the last five years they're up 15 a year and roic one of my favorite metrics is 22 over the last five years that's their average so we're talking about not only does the car look nice not only does the 20f look nice but the financial data looks nice as well and so it makes sense that people love this company no i i think that's super fascinating andrew especially when you start breaking down all those numbers and you know whenever whenever i uh mentioned ferrari you're like yeah everybody loves ferrari and but then when you start actually reading it and digging into it i i quickly understood why um and i i think so ferrari's pe right now is somewhere between 34 and 36 uh times their earnings and compared to ford and gm and all the others that's astronomically high um what what is their pe telling you right now is this a company that maybe we'll watch for the future or what's that pe telling you right now the pe is telling me that um investors like the stock like a lot more than they like ford and gm and hopefully that's obvious uh for the reasons we mentioned like ford and gms are making these cars that are more like a commodity and ferrari is more great you know they have a scarcity and is different than a commodity i think what it also shows is the growth prospects investors see a much brighter growth future for ferrari than they do ford or gm and some of that could be related to the stumbles that Ford has had over their electric vehicle rollout, for example.

30:18But a lot of that could just be people believe in the pricing power of Ferrari and they think

30:23Stephen:that will continue and that it's sustainable, basically. And then the last piece of a high PE ratio, if it's not the growth, because we're not talking about take over the world kind of growth, that would ruin the scarcity behind it. So what we're really talking about for Ferrari is consistent above average growth. And so alongside that, you would also want to see steadiness in their earnings, steadiness in their profits. While all the other car companies scramble and they have these huge booms and busts as the car market, oversupplies and undersupplies. We saw that with the pandemic and all the shortages with the supply chains and things like that.

31:07Stephen:And Ferrari just keeps, like Costco, just keeps chugging along, kind of slow and steady. And I just did an interview with Lee, who wrote a great book called Stock Market Maestros. And he mentioned to me off the air how there's a book he read where the ending returns of a slow and I put slowing air quotes, but just like steady growth, like not crazy, not crazy high, not crazy low. just steady versus a company or a stock who's swinging, you know, 70 % up 40 % down, things like that. The steady compounder is the one who actually wins out. And that's because of the math behind those incremental multiplier improvements is quite powerful versus when you're, when you're losing, it's like the tortoise and the hare.

32:01Stephen:Um, when you, when you go too fast and then you're, you're slow it's you're making up for a lot and that takes a lot of effort and it takes a lot of time and it's generally less ideal so i think all those factors play into their pe do you think there's anything else like do you think do you think wall street just everybody on wall street wants a ferrari so they'll buy the stock as a substitute i think i think somebody in our community mentioned something like that is your wardrobe well stocked for the upcoming season change i'm recording and it's the first warm day we've had in a while and I'm realizing my wardrobe isn't as robust as it should be.

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