The ‘Tifosi’ is a collective name for a group of sports-mad Italians. It’s often used in Italian football. But it has also become synonymous with the legion of fans that support the Scuderia Ferrari Formula One™ team.
The Ferrari NV [NYSE:RACE] heritage is as much a part of Italian history as pizza, pasta, and the Roman Empire.
A couple of months back I flew into Bologna airport. I was off on a holiday through Tuscany. But Bologna is the closest major international airport to Maranello.
Maranello is the home of Ferrari. And boy you knew about it at Bologna. Ferrari was everywhere. You know how when you land at an airport and there are chauffeurs waiting to collect people? Well there were plenty of them, and a bunch just holding signs with the Ferrari prancing horse on them.
Oh, I wish I’d been going with those guys.
The perpetual dream machine
Ferrari in Italy is more than just a car company. It’s the heart and soul of Italy. It’s prestige, luxury, performance, craftsmanship, history, and passion. In Italy, everyone is Ferrari. It’s why their Formula One™ team is built around the principle of ‘Essere Ferrari’.
John Elkann, the heir of Gianni Agnelli and current chairman of Fiat Chrysler and Ferrari, describes ‘Essere Ferrari’ as:
‘…being part of a story that is without equal. A story that began 90 years ago with the tenacity of our founder Enzo Ferrari, with his passion for racing… and winning! A story that, every day, continues to live through.’
This is why when you look at Ferrari you need to look beyond the fact they make cars. That’s like saying that Apple Inc [NASDAQ:AAPL] just makes computers and phones.
There’s far more to what you might see on the surface. The average investor might look at a company like Ferrari and think to themselves, that’s just another car company. Sure, they make expensive cars, but they don’t just make cars.
That would be the wrong view.
Ferrari is a lifestyle company. They are a lifestyle brand. There are people worldwide that wear Ferrari-branded apparel and will never get near a Ferrari, let alone own one.
You only need to witness the sea of Tifosi, all decked out in Ferrari red at the Italian (Monza) F1 Grand Prix, as proof. Ferrari is a lifestyle, not just a car company.
That’s where the value in a company like Ferrari exists. It’s not apparent at first, but when you realise the obvious, it gives you a whole different perspective on the company…and the opportunity.
That’s why when Ferrari decided to list as a common stock in 2015, it got off to a rocky start. The company floated at US$52 in October 2015. By February 2016, it was trading around the US$34 mark.
But then the strategy of Sergio Marchionne started to come to fruition. His leadership strategy was to make Ferrari the brand of dreams. As he said back in 2015:
‘The company was founded on one simple principle.
‘You only produce one car less than the demand for the vehicle. You just don’t exceed that equation.’
And that strategy of the perpetual ‘Ferrari dream’ helped take the stock to a high of US$170 in July this year. In just four years, Ferrari had seen its stock price rise over 226%.
But as you might have noticed in our headline, we’re supposed to be talking about Virgin Galactic here.
Why on Earth have we spent half of today’s essay talking about Ferrari?
Same same, but different
Virgin Galactic Holdings [NYSE:SPCE] debuted on the New York Stock Exchange on Monday, 28 October. Shares opened at US$12.34 and pushed up as high as US$12.93.
As of the market close on Tuesday, the stock was down to US$10.99 and an approximate market cap of around US$1 billion.
Already the talk is rampant about this being a space company. All they do is build rockets to send people into space for three to four minutes at a time.
The process and experience is far more than that. It’s a multiday training experience with pre- and post-flight attention. The flight is around 90 minutes and the technical part in space is only about three to four minutes.
Don’t forget this is all under the service expectations of the Virgin brands and companies. They are really working on making the whole process an ‘experience’. You only need to look at the ‘Spaceport America’ facility to see this.
And it would want to be an experience at US$250,000 a ticket.
But on the face of it, sure, Virgin Galactic is just a space tourism company…in the same way that Ferrari is just a car maker.
Make that assumption about Virgin Galactic and you’ll find yourself potentially missing what I’m calling ‘Ferrari Version 2’.
Virgin Galactic is not a space tourism company. They’re a lifestyle brand. They are an exclusivity brand. They are prestige, luxury, performance, craftsmanship, history, and passion.
They are operating on a similar model to what Marchionne put into place in 2015 at Ferrari.
The supply of seats on Virgin Galactic space rockets will always be at least one less than the demand for them. This creates a community of ‘astronauts’ who do manage to get a seat…the stuff of dreams.
Virgin Galactic is as much a company that sells dreams as much as Ferrari is.
The product isn’t space, it’s exclusivity
Take for example Virgin’s partnership with Land Rover. Together they’ve released an ‘Astronaut Edition’ Range Rover. The catch is it’s only available to ‘…signed up future astronauts’.
If you see someone rolling around in an ‘Astronaut Edition’, you immediately know they’ve been up there. It’s a car that’s a badge of honour. This is the kind of exclusivity that Virgin is building for their lifestyle brand.
Furthermore, they forecast that between 2020 and 2023 they will have 3,242 passengers actually go into space. That would make them part of one of the most exclusive luxury brands on Earth.
They aren’t ashamed to be targeting the rich. They know that’s their sweet spot. The average person on the street isn’t going to get near Spaceport America, let alone get up into space.
It’s aspirational and for those that can afford it, the latest in exclusive experiences.
Of course they still need to be profitable. And they’re forecasting a 66% profit margin on every space flight. And that by 2023 they’ll be generating earnings before interest and tax of US$274 million.
They say at a 5.5-times multiple it would give the company a market cap of around US$1.5 billion. For comparison, Ferrari made a US$890 profit before taxes in 2018 and has a market cap of around US$39 billion trading at a P/E ratio of 32-times.
By 2023 if Virgin hit their forecasts, then we’d expect a far higher multiple than 5.5-times. Somewhere between 20-times and 30-times wouldn’t be a stretch. And if they were in the same ballpark as Ferrari, then Virgin could be looking at a future market cap of around $8.5 billion. Just a cool 750% gain in the next four years.
Of course we might be wrong. And there’s a lot of water to pass under the bridge. As of today they haven’t sent a single paying customer into space. We would expect, like Ferrari in these early days, there will be a lot of volatility in the Virgin Galactic stock.
And there’s a good chance it could head lower in the coming months.
Right now, there are plenty of detractors of this ‘space company’. But anyone who calls them that clearly doesn’t understand the strategy. Long term, it might just be worth a smart punt if you understand what they’re building.
Virgin Galactic is a lifestyle brand. That’s where the real value lies for this promising stock.
Editor, Money Morning
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