Key risk factors affecting valuation multiples
In our last article, we discussed how investors can use a combination of various valuation methods to make an investment decision on Ferrari (RACE) stock. However, it’s also important to understand that these valuation multiples can change based on many internal and external risk factors. In this final article of the series, we’ll talk about some of these potential risks that could affect Ferrari’s valuation multiples.
Change in long-term growth expectations
As one of the most important value drivers, growth can affect valuation multiples in many possible ways. As we know, Ferrari has a stable business model with a proven track record of positive cash flows. The company doesn’t require a high amount of capital reinvestment for future earnings growth. The strategy of exclusivity also helps the company to remain highly profitable at the same time.
Going forward, the market will remain focused on factors such as quality and sustainability of growth. Therefore, any revision by investors and analysts in Ferrari’s long-term growth expectations is likely to drive valuation multiples.
Dependence on Scuderia Ferrari
As noted earlier in the series, Ferrari’s brand image is highly dependent on the success of its racing team, Scuderia Ferrari. The team hasn’t won a racing title since 2008. If the team doesn’t improve performance in the near term, then it may negatively affect Ferrari’s image as a symbol of victory, power, and style. Without such a strong perception among motorsport enthusiasts, it would be difficult for Ferrari to maintain its existing excellent pricing power.
Change in strategy
Furthermore, after the departure of Luca Cordero di Montezemolo from Ferrari in late 2014, the uncertainty about Ferrari’s future leadership still exists. This was followed by the separation of Ferrari from the parent Fiat Chrysler Automobile (FCAU).
Montezemolo believed in limiting the company’s production volume to maintain exclusivity and scarcity of Ferrari vehicles. Going forward, if the management decides to significantly increase the vehicle production volume, then it may also affect Ferrari’s ability to sell cars with high-profit margins. Because the implementation of such a growth plan will have to be funded by additional capital (investment in manufacturing plants and machinery), it would negatively affect the company’s valuation multiple.
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