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The Race Between Tesla Inc and Ferrari Isn’t Close

You will be hard-pressed to find an auto stock that can stand up to Tesla (NASDAQ:TSLA) stock of late — 64.6% return this year vs. 22.3% by the Global Auto Index Fund (NASDAQ:CARZ).

Source: Tesla

Similarly, Tesla is hard to beat on the road, with its cars having put to shame some of the world’s fastest supercars.

And Tesla has gained new bragging rights as the world’s fastest SUV after the Model X and Model S P100DL smoked a Lamborghini Aventador in a quarter-mile drag strip race. Tesla has its high-end electric motors, capable of generating massive amounts of instant torque, and near-5,000-pound weight to thank for the feat.

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High-end Tesla cars on Ludicrous mode are blazingly fast — 0-60 mph in a mere 2.28 seconds. One supercar, though, still manages to edge them out — Ferrari‘s (BIT:RACE) LaFerrari, which can reach 60 mph in 2.2 seconds flat. For some perspective, consider that an average family SUV takes roughly 8 seconds to hit that speed. Interestingly, RACE stock is the only auto stock that can hold a candle to TSLA stock. RACE stock is up an amazing 101.3% year-to-date and 122.7% over the past 12 months.

RACE stock has more than doubled since its IPO, while TSLA stock had only managed to climb 20% at a similar stage in its public life. So, why is RACE stock smoking TSLA stock? It can’t be about the speed, can it?

TSLA Stock vs. RACE = Growth vs. Margins

Investors tend to be enamored with high-growth companies, and few in the auto stock industry are growing at a faster clip than Tesla. It’s therefore quite surprising that Ferrari, which has only been growing in the low- to mid-single-digits, has been able to handily outperform TSLA stock which has a trailing 12-month revenue growth of over 100%. Further, Tesla’s production could hit nearly 1 million vehicles as early as 2020, good for a nearly 90% compound annual growth rate. In sharp contrast, Ferrari has only been selling 7,000-8,000 units per annum over the past five years, and is looking to get to around 10,000 vehicles by 2019, or only about 4% CAGR.

Welcome to the world of long-term investing, where somewhat mundane concepts such as return on invested capital (ROIC) sometimes trump simple growth numbers. Investors use ROIC to get an idea of how efficiently a company is using shareholder money to generate returns. If the ROIC exceeds the weighted average cost of capital (WACC), then the company is creating for shareholder value and vice-versa. ROIC is an important metric for capital intensive industries such as auto, oil and semiconductors.

Here’s the kicker: Not only does Ferrari sport the fattest margins in the business, but also has the highest ROIC by some distance. Ferrari’s profit metrics are way higher than those of other mainstream manufacturers such as Ford (NYSE:F), as well as luxury manufacturers such as BMW and Porsche.

Revenue(MM) Units Sales (MM) ASP (000) EBIT Margin Avg. ROIC Ford ($) 151,800 6.65 22.8 3.7% 10% BMW(€) 94,163 2.37 39.8 10.0% 20% Porsche (€) 22,318 0.24 93.4 17.4% 40 Ferrari (€) 3,105 0.01 388.1 20.4% 100% Tesla ($) 30,872 0.44 70.6 5.3% ??

* Based on 2016 figures.

You can clearly see there’s an inverse relationship between production volume and ROIC. Ferrari deals in entirely discretionary luxury goods, and strongly limits its production to preserve the exclusivity of the brand and its high margins. The company requires little incremental capital to continue growing its business in the single digits. It’s not too hard to model Ferrari’s sales and profits 3, 5 or even 10 years from now.

Tesla Has Built a Unique Model

Tesla’s business model, on the other hand, is the antithesis of Ferrari’s. The company is scaling from a high-end, low-volume manufacturer to a mass manufacturer. This is a highly capital-intensive business, and it’s hard at this point to tell whether Tesla’s ROIC will eventually look like Ford’s, BMW’s or even Porsche’s (average ROIC in the S&P 500 is 10%). In short, Tesla’s ROIC is indeterminable.

Further, Tesla is more than 80% vertically integrated, something that is rare in the auto world. Tesla is a throwback to the Henry Ford era, and has successfully managed to fuse together electronics, metal,  batteries and software. We are still not quite sure how this will play out in the long run.

Still, Tesla has a lot going for it. Battery costs make up a big part of the cost of manufacturing electric vehicles. Luckily for TSLA stock (and other EV manufacturers), battery costs have been falling rapidly, and Tesla is said to be among the lowest, if not the lowest cost, battery pack manufacturers. Additionally, Tesla provides high-end components and software such as Autopilot that can drive the base car average selling price up by as much as 10%.

Bottom Line on Tesla Stock

RACE stock offers long-term stability, including excellent revenue and income visibility. This is a healthy 78-year-old company with a strong moat and a management team that’s hellbent on keeping things that way.

Tesla, on the other hand, is a 14-year-old company that’s trying to disrupt a 104-year-old industry. That comes with a lot of risks of course, including the possibility of itself being disrupted in the future. Nevertheless, Tesla is ahead of the curve in an EV industry that has been predicted to grow 100-fold over the next three decades.

What’s not to like about both stocks?

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