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Is Ferrari Racing on a Rough Road?

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Jan. 11 2016, Updated 11:15 p.m. ET

Current versus possible scenario

Ferrari (RACE) stock began trading on the NYSE (New York Stock Exchange) on October 21, 2015. The company’s IPO investors showed interest in the stock despite analysts saying that the stock was overvalued. This reflects the brand power of the company that claims to sell dreams and not just cars. Ferrari offered around 18.9 million shares for $48 to $52 each.

As noted earlier, the company has plans to boost its sales from 7,255 units to 9,000 units per year by 2019. That means a 24% increase in sales numbers, which looks reasonable. Going forward, it shouldn’t be a tough task for a company like Ferrari to increase sales numbers significantly, but the main challenge for the company could be to maintain high profit margins with increased volume. This is simply based on the fact that Ferrari’s customers value a Ferrari at an extraordinarily high price because of the exclusivity. If the company decides to aggressively push vehicle sales, then it might incur a comparatively high cost of sales. Plus, customers may not want to pay as much money to buy a vehicle that they consider common.

Ferrari makes up nearly 0.52% of the Renaissance Capital’s IPO ETF (IPO). That makes this fund the first ETF with exposure to Ferrari.

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High competition ahead

Ferrari is expected to face competition in the coming years from global automobile giants like Volkswagen (VLKAF) and Daimler (DDAIF). In 2014, Volkswagen introduced six new car models under its luxury brands Bentley and Lamborghini: the Flying Spur V8, the Continental GTV8, the Continental GTC V8S convertible, the Mulsanne Speed, the Continental GT3-R, and the Huracán.

Notably, Fiat Chrysler Automobiles (FCAU) also has plans to aggressively work on its strategy to capture the global luxury car segment with the relaunch of Alfa Romeo luxury car brand along with increased production of its Maserati brand. Going forward, FCA’s demerger from Ferrari will allow FCA Group to fund these business plans.

Tesla (TSLA) forms nearly 2.7% of the SPDR Morgan Stanley Technology ETF (MTK).

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