Ferrari SpA (NYSE: RACE) will start trading on the NYSE on Wednesday, Oct. 21, and the Ferrari share price will hinge on one factor: valuation.
Ferrari's fair value has been a flashpoint among analysts since the luxury car maker announced initial public offering plans in July. Initially, many analysts put Ferrari's fair value between $5 billion and $7 billion.
However, CEO and Chairman Sergio Marchionne has been pushing for a Ferrari valuation as high as $13.5 billion.
Wednesday, the company will offer 17.2 million shares, and the Ferrari share price range has been set between $48 and $52. At the midpoint of that range, the company would be valued at close to $10 billion. While below Marchionne's target, a $10 billion valuation would still be regarded as a win.
Marchionne is targeting such a high valuation because he says Ferrari is recession-proof.
Marchionne cites Ferrari's strong financial results throughout the downturn that began in 2007. While other car makers and luxury goods companies suffered, Ferrari's revenue and profit only dipped slightly in 2009 at the depth of the downturn.
Ferrari also has growing high-class appeal.
The company says it intentionally caps production at about 7,000 vehicles a year to add scarcity value. On average, new customers spend a year on its waiting list before taking delivery of their Ferrari.
In its IPO prospectus, Ferrari said it would increase production in 2019 to 9,000 vehicles. That's close to the 10,000 that Marchionne says the company could sell annually without diminishing its prestige.
The caps allow Ferrari to "focus on maintaining low volumes and exclusivity." Yet it also "limits our potential sales growth and profitability."
And that's not the only potential problem for the Ferrari share price following the Ferrari IPO...
International Expansion Has Major Impact on Ferrari Share Price
Marchionne has proposed increasing sales in emerging markets such as China while maintaining sales in mature markets like the United States and Europe.
But China is not the same market it once was. Data out Monday showed China's economic growth has slowed to its lowest point in seven years.
And that's not the only concern...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
About 57% of Ferrari's non-current assets - a company's long-term investments or materials - consist of brand value. These are listed as "goodwill" and "intangible assets" on the balance sheet. Both items include the value of a company's name, copyrights, patents, and intellectual property.
In other words, "goodwill" and "intangible assets" have no physical value. Ferrari believes its luxury brand power will fuel future growth and expand sales operations. Many investors are concerned that so much of Ferrari's possible $9 billion valuation is tied to "branding."
Investors will be carefully watching the Ferrari share price performance given the lofty IPO price range and a difficult IPO market.
The amount of capital raised from U.S. offerings is set to close 2015 at a level well below last year. U.S. listings raised about $30 billion through mid-October. That compares with $82 billion by that point in 2014 and $42 billion in the same period in 2013, according to Dealogic.
Additionally, 67 IPOs have already been withdrawn or postponed so far this year, Dealogic data shows. That's more than any full year since 92 were pulled in 2012.
A growing number of companies that have managed to launch since Labor Day have seen their deals priced below the offer range and experienced first day closes below their offer price, according to The Wall Street Journal.
That choppiness in the IPO market could end up having a major impact on the Ferrari share price once RACE stock begins trading.
Stay informed on what's going on in the markets by following us on Twitter @moneymorning.
The Global Wealth Gap Is Now Alarmingly Wide: The top 0.7% of people in the world now control more than 45% of the entire world's wealth. But it's not just the lower class that's suffering. The global middle class is controlling less and less wealth every year...
Related Articles: