After some lackluster performances in Formula One – the pinnacle of motor racing – it’s finally good to be Ferrari (NYSE:RACE). Recently, the Prancing Horse secured the signature of Lewis Hamilton, a seven-time F1 world champion and winner of a record 103 races, which also led to soaring options volume. Almost as an afterthought, Ferrari printed an impressive earnings report, with ambitions to perform even better in 2024. With so many credible positives, the bears should steer clear. I am bullish on RACE stock.
Lewis Hamilton and Positive Earnings Print Boost RACE Stock
On the financial front, Wall Street focused on the luxury sports car manufacturer’s fourth-quarter earnings report. While the Lewis Hamilton news revved up the fanbase, it’s important not to ignore the Q4 print, which contributed to significant upside for RACE stock on the day.
On the bottom line, the automaker posted a net profit of €294 million or $317.9 million. For the full year, the company delivered a net profit of €1.26 billion or $1.36 billion. On the top line, Ferrari rang up €1.523 billion in sales or roughly $1.66 billion. For 2023, the iconic enterprise posted sales of €5.97 billion or $6.46 billion, representing a 17% expansion from the prior year.
What’s more, these records might not last long. In true competitive form, management anticipates moving to higher peaks. For example, the leadership team sees top-line sales reaching €6.4 billion or $6.9 billion by the end of 2024. Naturally, RACE stock popped up almost 13% on the encouraging disclosure.
Still, the longer-term catalyst is Hamilton joining Ferrari’s F1 team. For one thing, motor racing fans now have a compelling storyline to monitor as Hamilton finishes off his final year with his current unit, the Mercedes-AMG Petronas F1 Team. Further, when 2025 rolls around and Hamilton makes his debut in red, the sports media ecosystem should have a field day.
More importantly, the dramatic boost in interest should help fuel Ferrari’s merchandise business. Generally speaking, the company generates almost as much revenue from merchandise as it does its iconic sports cars. When you combine a superstar athlete with a globally recognized and desired brand, good things are almost bound to happen. And given that Hamilton inked a multi-year deal, the underlying tailwind should last for a while.
Ferrari Call Options Represent a Buy, Not a Short Sell
With Ferrari being the toast of the town, it wasn’t surprising to see RACE stock light up the derivative market’s board. Indeed, in terms of unusual options volume, RACE represented significantly heightened activity. Specifically, total volume reached 11,062 contracts against an open interest reading of 19,083 contracts. Further, Thursday’s volume jumped 627.76% over its trailing one-month average metric.
Drilling down into the details, call volume reached 7,146 contracts against put volume of 3,916 contracts. This pairing yielded a put/call volume ratio of 0.55, which on paper implies bullishness. After all, more traders are engaging call options – which give holders the right but not the obligation to buy the underlying security – than put options. However, not all the calls featured optimistic sentiment.
Specifically, an options flow screener showed a big block transaction of 503 contracts sold of the RACE Mar 15 ’24 360.00 Call. At face value, this order represents a wager that RACE stock will not exceed the $360 strike price prior to the March 15 expiration date. To demonstrate the conviction, the option writer received a premium of nearly $1.39 million for selling the contract.
However, this position risks getting blown up. First, the trader placed the order when RACE stock was trading at $381.66. Second, Ferrari, as stated earlier, delivered news that should help both the core (car selling) and merchandising businesses. Third and perhaps most importantly, the company enjoys a large and burgeoning total addressable market.
According to data from the Board of Governors of the Federal Reserve System, the share of net worth held by the top tenth of a percent in this nation jumped from 12.3% in Q4 2019 to 13.9% in Q3 2023. Essentially, the demographic that can comfortably afford Ferraris is benefiting from the expanding wealth gap.
Ignore the Earnings Premium Because It’s Not Relevant
Now, one criticism that may pop up is that RACE stock is overvalued. Indeed, shares trade at a trailing-year earnings multiple of 52x. That’s well above auto manufacturers’ average price-earnings (PE) ratio of 23.65x. So, does that mean Ferrari should be avoided until a better valuation is achieved?
The thing is, RACE stock might not get substantially cheaper for a very long time. Yes, at the end of the day, it is an automaker. However, no other car company sells as much merchandise as it does cars. Ferrari isn’t just about exotic racing machines. Rather, it’s a status symbol – one for which people are more than willing to pay a hefty premium.
Is RACE Stock a Buy, According to Analysts?
Turning to Wall Street, RACE stock has a Moderate Buy consensus rating based on eight Buys, eight Holds, and zero Sell ratings. The average RACE stock price target is $366.24, implying 3.4% downside risk.
The Takeaway: RACE Stock is Ready to Soar for the Long Haul
Ferrari is in the fast lane after securing Formula One legend Lewis Hamilton and delivering impressive financial results. RACE stock surged following a 17% sales increase in 2023, ambitious growth targets for 2024, and the highly anticipated arrival of Hamilton in 2025. Naturally, this development sparked a surge in call options activity. While some may find it overvalued, Ferrari’s unique brand and loyal fanbase suggest its premium price might be here to stay.