Ferrari Faces Electric Threat

(Bloomberg Gadfly) -- Along with a crimson paint-job, a Ferrari's ear-splitting growl is what makes fans weak at the knees --and willing to shell out up to $2 million to buy one. (Prospective buyers can even listen to a sound-clip of a V12 engine on Ferrari's website.)

But investors should ponder whether Ferrari's full-throated combustion engines aren't a potential liability.

For now, it's cruising. The company beat expectations for third-quarter profit and raised its full-year earnings target. That propelled the shares to a more than 5 percent gain, meaning the stock is back above the $52 (47 euro) IPO price.  

But like its cars, Ferrari's shares aren't cheap. They trade on 25 times estimated 2016 earnings, about treble what BMW fetches and not far off a luxury goods company such as Prada.

Because Ferrari sells fewer than 10,000 cars a year it doesn't have to comply with the same tough emissions rules as bigger carmakers such as BMW. But that doesn't mean electrification isn't a threat.

The planet is warming faster than feared and the effects are becoming apparent even to skeptics. So there's a risk that combustion engines could rapidly start to feel dated. Worse: the roar of a Ferrari tearing through the streets of London or Los Angeles may one day trigger feelings of hostility, not forbearance or jealousy. Remember smoking in restaurants?

CEO Sergio Marchionne says most or all of Ferrari's cars will be "hybridized" from 2019, meaning they'll have both combustion engines and electric motors. But he's said that building a fully-electric Ferrari would be "almost obscene", because electric cars are too quiet.

Marchionne's no fool. His customers -- many of whom own more than one Ferrari -- doubtless feel exactly the same way. The trouble is, even the tastes of old, rich folks change. The Blackberry was indispensable until it wasn't.

The combustion engine has already lost one advantage over electric cars: speed. An upgraded Tesla Model S can accelerate to 60 miles an hour in just 2.5 seconds, the same as Bugatti Veyron and Ferrari's LaFerrari.   

Because battery vehicles all have instant torque, lots of electric cars will presumably be capable of similar. Porsche, Mercedes-Benz and Audi are all bringing out luxury electric models. Speed could become commoditized. 

Of course, Ferrari could probably build an electric car but that would lift R&D spending, impairing profit growth. At about 20 percent of sales, Ferrari's R&D spending is already proportionately higher than rivals because its sales volumes are much lower.

A sudden industry shift might also hamper Ferrari's new car sales because customers would worry their combustion engine vehicles wouldn't retain their high residual values. Ferrari also makes money by selling combustion engines to Maserati, accounting for about 6 percent of revenue last year.

If this all seems too gloomy, here's what Ferrari's IPO prospectus had to say:

Governmental regulations may increase the costs we incur to design, develop and produce our cars and may affect our product portfolio. Regulation may also result in a change in the character or performance characteristics of our cars which may render them less appealing to our clients. We anticipate that the number and extent of these regulations, and their effect on our cost structure and product line-up, will increase significantly in the future

Daimler and BMW's shares have lagged because investors fear they'll incur high costs shifting from gasoline to electric vehicles. The prancing horse might get a jolt too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

1. Ferrari's R&D spending also includes Formula One costs

To contact the author of this story: Chris Bryant in Frankfurt at cbryant32@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.