From hoopla to crash in less than four months.
Italian automaker Ferrari was spun off from Fiat Chrysler beginning in October last year via an IPO in the US. Why an IPO in the US? Because that’s where the easy money is.
With an IPO price of $52 a share, the company sported (briefly) a valuation of $9.8 billion. Shares instantly traded higher on the New York Stock exchange after enormous Wall Street hoopla to a high of $60.97 that day. Then reality set in, and shares meandered lower, until this morning when they plunged 14.8% to a new low of $34.03, before bouncing off a little to $34.68 near the close, down 13% for the day, down 43% in less than four months.
What whacked shares today? Lousy results. And an outlook of more lousy results.
No doubt, the cars are spectacular. And very expensive, with prices ranging from $180,000 to over $400,000. Middle-aged guys dream of pulling up in front of a chic café where all the young women hang out. Others dream of racing these cars through the mountains or around a race track. Others collect them. But the numbers are less than spectacular, and the outlook, let’s say, uninspiring.
Then there’s the question of how everything deteriorated so fast, in just a few months, as the IPO hype died down? Why did reality show up in the first quarterly report after the IPO? Where have the hope and hoopla gone?
In the fourth quarter, net revenue fell 1% to €744 million. For the year, revenue edged up 3%, but on a constant currencies basis fell 3%. Net profit for the quarter plunged 30% from a year ago to €55 million. Based on the pre-IPO quarters, when profits had been strong, total profit for the year still rose 9.4%
But at least, unlike Tesla, Ferrari is profitable. It makes money on each car it sells and doesn’t have a business model that relies on capturing taxpayer subsidies. On the contrary. In many countries, there are special taxes and duties on Ferraris. And Ferraris have often made very good investments in the past, with some select models becoming multi-million-dollar collectors’ items for the super-rich.
And this theme too was part of the IPO hype, as The Street put it at the time of the IPO, “9 of the 10 Most Expensive Cars Ever Sold Are Ferraris.” The star is a 1962 Ferrari 250 GTO Berlinetta, which sold for $38.1 million at auction in California in August 2014, the most ever for a car.
But Ferrari shareholders didn’t buy the cars. They bought the shares.
So the company forecast that revenue would increase a miserably small 1.6% to €2.9 billion in 2016 and “adjusted gross operating profit” (EBITDA) would increase 2.9% to €770 million. Perhaps wisely, it didn’t forecast net profit – the item that had plunged the most in the quarter.
But here’s the thing: in the last pre-IPO quarter, ended September 30, net revenues had risen 9.2% year-over-year and net profit had soared 62%! For the nine month ended September 30, net revenue had risen 5% and net profit 26%. Those were decent numbers!
Now in the first quarter after the IPO, reality trickled in with revenues that declined and profits that plunged. What a difference an IPO can make!
There was another meme that carried the day during the IPO hype – that Ferraris, being so expensive, are essentially recession-proof. The logic is that they’re toys for the super-rich who don’t really notice recessions that much anyway; though their net worth might drop, they don’t depend on their paychecks to make rent or car payments. And so a recession won’t dent Ferrari sales. That’s the theory. But Ferrari’s growth rates, if any, shed doubt on that meme.
And that infamous crackdown in China on corruption, or at least on the ostentatious display of the fruits of corruption, started two years ago. By the time Ferrari went public, it was already baked into the sales numbers from China.
So Ferrari joins the slew of other recent IPOs that soared into the blue sky before they crashed and burned. They’d found the “easy money,” which was then expertly transferred to the sellers and to Wall Street in form of fees. That’s how the IPO wealth-transfer machine works. A few spectacular winners are endlessly held up to lure investors into the market. And there are the many losers.
But it seems the “easy money” has opened its eyes. The number of IPOs collapsed late last year and made 2015 the worst year for IPOs since 2009. There were only two IPOs in December, which made it the worst December since 2008. There were no IPOs in January this year, the worst month since December 2008. And for those IPO stocks, like Ferrari, that made it out of the gate, it has become a truly ugly time. Read… IPOs Crash, Startup Valuations Plunge, Era Ends