Ferrari NV (NYSE: RACE) stock is down 13.4% during its two-month period as a public company. And our Ferrari stock price prediction shows further decline over the first three quarters of 2016.
Many investors thought Ferrari stock would skyrocket after the company's highly anticipated market debut. On Oct. 21, the Ferrari IPO raised $893 million by selling 17.2 million shares for $52 each. According to Renaissance Capital, a manager of IPO-focused ETFs, the deal ranks as the fourth-largest IPO of 2015 and the largest from the consumer goods sector.
The Ferrari stock price was up as much as 17% during its first day of trading. Shares of RACE closed at $55, marking a 5.8% gain from the $52 IPO price.
But the gains didn't last more than a week...
On Oct. 28, Ferrari stock closed below the IPO price at $51.87 after four straight days of losses. Shares have fallen 8.2% since and closed at $47.62 on Dec. 8.
And we only see the Ferrari stock price heading lower in 2016. Here are the two biggest reasons why...
Two Reasons Why Our Ferrari Stock Price Prediction Is Bearish
Bearish Ferrari Stock Price Prediction Reason No. 1: An "Intangible" Valuation
After pricing at $52 a share, Ferrari commanded an $11.3 billion valuation. That's way too high for an automaker like Ferrari. After all, it's roughly 43 times larger than the company's total profit in 2014.
And the reason behind the huge valuation is the company's luxurious brand, not strong financials.
According to the company's U.S. Securities and Exchange Commission filings, Ferrari views itself as a luxury company rather than a car company. In fact, the word "luxury" appears in the IPO filing 151 times.
This chart shows why Ferrari's "luxury" valuation doesn't add up...
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. But Ferrari is confident that luxury brand power will fuel future growth.
That shows how Ferrari wants investors to gamble on a company with a valuation built on a non-tangible brand. And the gamble is even more dangerous as the company experiences a slowdown in revenue growth.
From 2012 to 2013, the company's revenue increased only 5% to 2.3 billion euros ($3.2 billion). That compares to an 8% increase from 2011 to 2012. Although Ferrari caps annual sales at 7,000 units to maintain exclusivity and prestige, the company came in short at 6,922 cars in 2013.
But the inflated valuation isn't the only reason to avoid RACE stock...
Bearish Ferrari Stock Price Prediction Reason No. 2: The Volatile IPO Market
The second reason behind our Ferrari stock price prediction is the weak IPO market.
In 2015, IPOs have seen an average decline of 2.7% from their offer prices. That's considerably worse than the average gain of 21% for all 2014 IPOs. There have only been 168 IPOs in 2015 so far, down 36% from 262 deals a year ago.
According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, IPO investing is always dangerous for retail investors. That's because traders who aren't investment bankers or wealthy hedge fund managers can incur huge losses if they're not careful.
"IPOs are little more than a get-rich-quick scheme that's so heavily stacked against you that it makes the house odds in Vegas seem downright conservative," Fitz-Gerald said in June.
A good rule-of-thumb for new stocks like Ferrari is to wait at least three quarters before investing. That's because you need to make the company prove it's worth your money by impressing you with a few solid earnings reports.
One disastrous earnings report can send a stock plunging. Etsy Inc. (Nasdaq: ETSY) went public in April and reported a huge loss of $36.6 million in its first earnings report. ETSY stock responded by falling more than 19%. The numbers reflected how far away Etsy is from becoming profitable.
Although Ferrari is already profitable, you want to make sure it doesn't start piling up losses or start becoming less profitable. The only way to determine that is to wait for a few quarterly earnings reports to come out.
"IPO hype is based on what 'could be,' not what 'is,'" Fitz-Gerald said. "Many times management cannot make the jump, and you do not want to pay the price for finding out which is which."
Alex McGuire is an associate editor for Money Morning who writes about the IPO market. Follow him on Twitter for news on the biggest upcoming IPOs.
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