Turtle Soup*: Aston Martin 1st Half 2022 Results
August 5, 2022
Ferrari & Tesla’s 2020 Results
In the last two weeks, both Ferrari and Tesla have reported their 2020 full year results. This article is the first time I have analyzed Tesla’s results. I decided to do so alongside Ferrari’s as these are the two car companies that Wall Street values very differently from other car companies. Tesla’s current market capitalization of $820 billion is larger than the next twelve most valuable car companies combined, which includes Ferrari with a market cap of $50 billion. Looked at another way, the market values Tesla at $1.59 million for every car it produced in 2020. The comparable number for Ferrari is $5.48 million. To put these extraordinary numbers in reference, Aston Martin is valued at around $500k for every vehicle it produces currently. Moving furthering into the mass market BMW is at $24k per car, with Ford sitting at $23k. Another way to look at it is you could buy 29 top of the line Tesla Model 3 cars for the same $ value that Wall Street gives to Tesla for each car it produces. Applying the same math to Ferrari would get you 3 Monza SP1s or 8 SF90s. On the more mass-market side, BMWs per car produced valuation would only by you a 1/3rd of a M3. Not sure if any of this is really relevant but I do find it interesting. Looking at the more established benchmark of P/E (Trailing), Ferrari’s currently is 45 which puts it squarely in the middle of other luxury goods companies like LVMH and Hermes. Telsa’s P/E is 1,331 which is more in line with a high growth tech company that has just turned profitable. Most other car companies carry P/Es in the single to low double digits. The question is what sort of results did Ferrari and Tesla deliver in 2020 to deserve these rich valuations. The summary from the last look at Ferrari was when they delivered a strong Q3 2020:
Unlike Aston Martin, which is still basically a train wreck with the hope that the light at the end of the tunnel isn’t another train coming at them, Ferrari turned in another very solid quarter given the circumstances. In fact, if it was a normal year, you would look at Ferrari’s Q3 results and probably walk away with the impression that they are only mildly disappointing. Shipments were down 7% vs. Q3 2019, with Sales at negative 3% and net profit up €2 million which is highly impressive. How they did this is quite interesting and shows the depth and experience of their management team. It also presents some risk going forward as I not sure that some of the levers they pulled to deliver these results are repeatable.
Ferrari
Starting with Ferrari, their2020 Earnings Call was led by the CFO, Antonio Picca Piccon. Piccon stepped in after former CEO Louis Camilleri retired suddenly in early December after catching Covid-19. While Piccon doesn’t quite have the same presence, he did do a nice job in a tough situation. The acting CEO, John Elkann was also on the call but largely stayed in the background. The earning’s call webcast is posted: Ferrari Q4 and FY 2020 Earnings Call. There were some specific comments that I found interesting:
- Full Year Key Results: The key numbers for Ferrari in 2020 were 9,119 cars sold, (down 10% vs 2019), Net Revenues of €3,460 million (-8%), and net profit of €609 million (-13%). When you factor in the 7-week manufacturing shutdown and Ferraris lack of excess production capacity, they have done an exceedingly good job of flexing production to higher value and higher margin cars while making up some of the lost production. However, Ferraris dependence on the Formula 1 team and other brand activities (stores and licensing royalties) to deliver profits is very clear when you consider the €148 million revenue decline in this area is seems to have flowed directly to the bottom line. Ferrari also made €32 million via currency hedges in 2020. I have to believe the prioritization of European deliveries which were basically flat year on year vs. North America, which were down 20%, had to play a key role as Ferrari watched the Euro consistently strengthened against the dollar in 2020.
- Electric Vehicles: When a similar question on EVs came up in the last conference call, Camilleri was elegantly evasive but did say he could not see Ferrari ever moving to an all EV portfolio and did not see it even reaching 50% in his tenure. On this he turned out to be sadly, completely accurate. When the question came up this time, Elkann stepped in to answer and was very explicit that in the coming decade there will not be a fully electric Ferrari. Hybrids yes, but fully electric no. For Ferrari, a fully electric car is perhaps a bigger challenge than for any of its competitors given how sound is such an integral part of the Ferrari experience. How you deliver sound from a basically noiseless powerplant without coming across as the world fastest, most expensive, boombox is a huge challenge.
- Portfolio: Ferrari introduced two new road models, the Roma and SF90 Stradale along with track only 488 Modificate in 2020 and is promising 3 more in 2021. Despite several ham-fisted attempts by analysts on the call to get Piccon to reveal what they might be, no details were forth coming. Piccon confirmed that the Roma has been very successful at bringing both female and new customers to Ferrari and the hybrid SF90 has been attracting younger customers. However both add a considerable amount of production complexity to a stressed Ferrari supply chain that has expanded from 6 models across 6,500 units in 2010 to 14 models across 9,119 units in 2020. Piccon also referenced that Ferrari spent €60 million in 2020 buying up land next to the existing factory in Maranello. This has to be for future production expansion plans which would be needed for the projected launch of a Ferrari SUV in 2022/2023.
- Product Mix & Profitability: Ferrari’s Q4 profits were €263 million up €97 million vs. Q4 2019. Portfolio mix was a positive €130 million while volume (lost units) was a negative €126. Reading through the report and comments, it would appear that it’s the Icona range Monza SP1 & SP2 that’s driving the gain. Icona was 2% of Ferrari’s 2020 production mix but over delivers on profitability per unit (in 2019 Icona was less than 1% of total production). If the reliance on the Icona range to goose profitability sounds familiar it’s because it’s a similar situation to the one McLaren put itself into. In Ferraris case, unlike the LaFerrari where demand far outstripped supply, the Monza SP1 & SP2 were a much harder sell and Ferrari got plenty of push back from some of their longest term, most loyal, customers. In the call, it was mentioned that Ferrari would be launching three new models in 2021 and its highly likely one will be the next car in the Icona series.
- Manufacturing Shutdown: The Covid-19 shut down cost Ferrari 2000 units in terms of lost production. Ferrari recovered at least 500 of these 2000 units. This is a clear indication that Ferrari has little to no excess manufacturing capacity in the system.
- New CEO: In his opening statement, John Elkann referenced the CEO search and stated that they intended to take the time necessary to find best possible CEO for the company. I would read this as they do not have a final CEO candidate and getting the right candidate will not be easy. While there are a number of highly appealing aspects to the role, it’s also not one a lot of potential CEOs will want as its going to be a difficult one to win in. The new CEO is going to have to navigate a hugely disruptive shift from ICE to hybrid and EV, turn around a F1 Team that has becoming increasingly uncompetitive in each of the last several seasons, launch a SUV while not diluting the brand equity, and do it all while continuing to drive the stock price. One major stumble and big earnings miss and Ferrari risks becoming a car, and not a luxury goods, company.
- Cash Flow, CAPEX, and Rewarding Shareholders: I was a bit surprised that there was no major discussion around the major drop in free cash flow and the potential impact going forward. 2020 came in at €172 million which is down from €700 million in 2019. This will likely have a significant major negative impact on investments in the short term. On a more positive note, CAPEX was held flat year on year so there was not cut in the investment for the future. Despite temporarily suspending its share repurchase program in Q2 2020, Ferrari still returned €340 million via both dividends and share repurchases in 2020. To put it in perspective, this is more than Aston Martin has made in cumulative profits in the last decade.
- Racing & Stores: The Formula 1 team was a major drag on Ferrari’s finances in 2020 as were the Ferrari Stores where Covid-19 had a major negative impact on in store traffic. Piccon mentioned that he expected the new Formula 1 Concorde agreement (between the F1 teams and F1 Commercial Rights Holder) and budget cap to be neutral for Ferrari. This was a bit of a surprise as the budget cap will be a major savings for most teams. My guess is Ferrari’s lack of competitiveness resulting in a loss in prize money is offsetting the savings being generated by the budget cap. It unlikely that this situation changes in the near term.
Overall, Ferrari has, and continues to be, very well managed.
Tesla
Moving on to Tesla, I went through the transcript of Tesla’s earning call twice looking for signs of a car company. There are hard to find. What I did find was a mobile power storage & transport company that is making rapid progress towards full autonomous vehicles. The data Tesla provides in the shareholder deck is quite light compared to its major competitors. The Tesla Earnings Call Webcast was dominated by Elon Musk with Tesla’s CFO, Zach Kirkhorn, and a couple of other executives participating. There were some specific areas & comments that I found interesting:
- Full Year Key Results: The key numbers for Tesla in 2020 were 499,550 cars sold, (up 36% vs 2019), Net Revenues (Automotive) of $27.2 billion (+31%), and net profit of $1,994 million (vs. loss of $69 million in 2019). 2020 was the 1st year in its history that Tesla was profitable. Tesla also received $1,580 million in regulatory credits in 2020. Dropping the regulatory credits from the total net profit number it looks like $414 million of net profit came from “true” car sales. Tesla also claimed in the Q4 report summary to have achieved an industry leading operating margin of 6.3% (as reference Ferrari’s is 17.6%).
- Market Cap: In his opening statement, Musk made the following comment on how he believes you can justify the current $820 billion valuation: “And I think there is a way, just with back of the on road map to potentially justify it, where if Tesla’s ships, let’s say, hypothetically, $50 billion or $60 billion worth of vehicles, and those vehicles become full self-driving and can be used in robotaxis — used as robotaxis, the utility increases from an average of 12 hours a week to potentially an average of 60 hours a week if they’re capable of serving as robotaxi. So that’s like roughly a five times increase in utility. But let’s — even if you say like, OK, let’s just assume that the car becomes twice as useful as — not five times as useful, but merely twice as useful, that would be a doubling again of the revenue of the company, which is almost entirely gross margin. So it would mean, it would be like if you made $50 million — $50 billion worth of cars, it will be like having $50 million of incremental profit basically from that because it’s just software. So — and the pace you get 20 PE on that, it’s like $1 trillion and the company is still in high-growth mode. So I think there is a way to sort of like justify the valuation of the company where it is using just the cars and nothing else, the cars with FSD (Full Self Drive). And I suspect at least some number of investors are taking that approach. So in conclusion, while 2020 was a turning point for Tesla and in terms of profitability, we believe this is just the beginning.” I will let everyone decipher this for themselves as even after reading it a few times, I am still at a bit of a loss.
And then later in answer to an analyst’s question, Musk further states: “we do think that we can maintain a growth rate in excess of 50% per year for many years to come.” When I looked at Tesla’s recent CAGRs (compounded annual growth rates) they are, last 5 years – 33.8%, most recent 3 years – 13.7%, so the actual growth rate in the automotive business has actually slowed. Using the $50 billion in car sales referenced in the paragraph above and doing a bit of back of the envelop math, at the current levels of operating margin, Tesla would still have a P/E of 664. If Tesla was able to achieve Ferrari type margins, the P/E would drop to 220. Other cutting-edge hardware and subscription software tech companies such as Apple and Microsoft have P/Es of 37 and 36 respectfully. As Tesla matures as a company, this P/E gap to the norm will naturally close. So either the stock price will eventually come back down to earth or Tesla’s profitability will need to increase dramatically.
- FSD (Full Self Drive): FSD is discussed extensively in the earnings call. Getting rid of humans actually driving cars seems to be both one of Tesla’s key objectives and a long-term profit center through both the base capability software sales along with on-going updates & subscriptions. The reality is the current regulatory environment is evolving and how quickly and extensively FSD will be allowed is going to vary from country to country. There are also significant cultural and perception hurdles for Tesla to overcome before FSD will achieve wide adoption. In China, which is one of Tesla big bet markets, only 1-2% of customers are opting for FSD capability. I believe the jury is still out on how big an opportunity FSD really is in the near to medium term.
- Competition & the Market: Other than a comment that Tesla is the only car to have a 0-60 mph time of under 2 seconds, Competition simply is not mentioned. Market share also isn’t discussed other than a simple statement that Electric Vehicles currently only make up about 1% of the total fleet worldwide. For Tesla to deliver the 50% CAGR Musk claims they can long term, they will need to take significant amount of market share from competitors. How is this working out? Per Forbes – Tesla China & Europe Shares, & Tesla Performance in Europe not so well. The Volkswagen Group (VAG) has recently launched several EVs under the Porsche, Audi, and VW brands that are all selling well. In fact, almost all the major manufacturers are now focusing on the EV market so competition will only intensify. Tesla’s current global market share is approximately 0.8%, In China it is 0.6%, and in the US, 1.4%. As a reference, VAG’s total global market share is around 10.7%. In just the EV market, it has been difficult to find numbers, but it looks like Tesla had 18% of the global EV market in 2020, up 1 point while VAG grew 2 points from a 4% share in 2019 to a 6% share in 2020. If Tesla is going to deliver a 50% CAGR long term, they need to be growing share faster than competition, not at half the rate.
- Capacity: In addition to the existing factory in Fremont, California, Telsa opened a new factory in Shanghai in 2020 and will be opening additional factories in Berlin and Texas in 2021. This will give Tesla four global production site with the following annual capacities: Fremont: 600k units, Shanghai: 450k units, Berlin: 500k units, and Texas: 500k units for a total global capacity of 2,050k units by year end 2021. In 2020, Tesla sold just under 500k cars. Assuming Tesla can achieve the targeted 50% CAGR, it will take 3 ½ years before demand catches up with production capacity. If Tesla grows at the 13.7% CAGR they have achieved in the last 3 years, they will be sitting on excess capacity for over a decade, leaving them running at Aston Martin type utilization rates for multiple years.
- Humans & Service: I don’t get the feeling Tesla as a company has a particularly high regard for humans, they clearly don’t want us driving, and when it comes to service, they don’t want you calling, please use the app.
Summary
Ferrari is a highly successful company doing a great job navigating in a challenging environment. Losing a great CEO in Louis Camilleri hurts but Ferrari clearly has a highly skilled executive team that will be able to carry the business during the transition. The F1 team continues to struggle and is unlikely to bounce back until 2022 at the earliest. The drop in free cash flow is a major concern and this needs to be recovered quickly in 2021 and 2022. How Ferrari manages the SUV launch plus the transition to hybrids and EVs will determine its long-term future. If the past, present, and future plans are clear, logical, and well documented at Ferrari, Tesla is the wild west. While I personally can’t get my head around Tesla $820 billion market cap, I know lots of very bright people have lost fortunes betting against Tesla. Can they deliver what they claim? It’s possible but a lot needs to go right, and the playing field is starting to get a lot more crowded. So, is Tesla worth $820 billion? I’m not sure that’s actually the right question. Is Tesla + Elon Musk worth $820 billion? Might be, if you are willing to assign a several hundred billion dollar valuation to Musk’s leadership & vision. Amazon with Bezos is now worth $1,650 billion. On the flip side, if I look at the value another brilliant celebrity CEO had on a company, GE under Jack Welsh was worth approximately $500 billion at its peak, today GE’s market cap is $100 billion.
Thoughts and comments? Please see the comments section below.
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Note: pictures are from Ferrari Media Center & Tesla’s shareholder presentation.
February 2021
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The issue for Tesla was that they developed the electric running gear for a car, but then struggled to make a car. Now automotive companies are catching up with that electric running gear and they already know how to make cars.
Tesla still has the advantage when it comes to self-driving, and they have hundreds of thousands of testers out testing. Apparently, Telsa have two computers in every car. One handling all the day to day activities, the other gathering data for autonomous driving and testing the decisions it would make against what the driver does.
That’s a lot of data, a lot of research. But to what end?
Run Musk’s word salad through a filter and one work sticks – “Taxi”. Self driving cars that you can dispatch quickly and efficiently without the need for a human reads as Uber without the need to pay someone. Then you start to realise the worth of Tesla when they might just be able to disrupt the ride sharing industry and without the hassle of needing any drivers!
Very well done!
Thank you for posting your thoughts on the Ferrari and Tesla valuations following their respective announcements of results. I have never thought or seen anyone comparing the mkt.cap per item sold so I agree with you, that whilst it makes interesting reading I am not so sure that it actually tells us anything. The mkt. cap of Tesla is driven by momentum rather than by underlying earnings assumptions. It is also based on the fact that data=money and the more information Tesla gathers on its customers/users the more valuable it becomes as a company. Ferrari builds exiting cars where the journey is the goal rather than the destination. Tesla is providing a transport solution between two points where the goal is taking you there as efficiently/sustainable as possible. Two completely different worlds where the jury is out on who becomes the winner.
I am still puzzled why Tesla’s vision statement reads “ to create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles” when clearly the market expects something far more ambitious than that judged by the valuation.
Musk justifying Tesla’s $820B market valuation. I think the phrase you are looking for is “word salad”.
Thanks for the analysis , excellent reading a you allow the reader to ”make of it what they will”, fascinating to watch as neither a real fan of Tesla or Ferrari cars . Wonder what the view of a personal shareholder would be?
Keep up the good work
Always love the blogs, thanks for writing them. I may have misunderstood, but is it the case that Tesla can gradually lose EV market share to VW etc, while still growing Tesla sales as part of an increasing global EV market? Is that how they see themselves progressing? Thanks.
Very interesting read as usual. My only comment is on the comparison between Tesla & VW group EV sales and market share . Tesla only sells direct to end customers, where VW books a sale when the car goes to the dealer. In the UK at least the dealers are full of unsold EV stock and particularly of ID3, so it feels like the market share comparison is a bit off.