Ferrari To Decline Further On Greedy IPO Bet

The most recent IPO I’ve kept track of has been Ferrari. After all, the company has only traded on the market for a month. While the IPO date went relatively well, the stock has been crashing since. Unfortunately, I believe that we’ve only seen the beginning when it comes to Ferrari. The reality is that the company made a detrimental mistake in the pricing of its IPO and now, they’re paying for it. Today, we’ll talk about the mistake in pricing, what we’ve seen from the stock throughout the past month, what we can expect to see moving forward and how binary options traders can take advantage of the trends.

Ferrari Overpriced Its IPO

We see this in the market all the time. A well-established company decides to go public. Considering the fact that they are well-established, they made a decision to price their IPO at a premium. That’s exactly what Ferrari did. The company’s IPO came at an incredible premium of about 40 times earnings. While that may slide in some industries, in the luxury automobile industry, that’s a big mistake. Nonetheless, the first day on the market went off without a hitch. On that day, the stock climbed by more than 10% to close at $56.75 per share. However, bad news was to come…

Following the excitement of the IPO, investors started to look at the stock’s PE ratio in comparison to other PE ratios in the industry. In the luxury automobile manufacturing space, companies like Rolls Royce, Daimler and BMD all trade at a PE ratio of under 10. So, the question quickly became, “Why is Ferrari worth 40 times earnings?” The answer become clear quickly as well… It’s not!

While it’s clear that Ferrari’s stock isn’t worth the IPO price, they tried to justify the high price by saying that they plan on increasing production. The company says that by the year 2019, it will grow annual production from 7,000 units to 9,000 units. Nonetheless, this is a bad idea as well. After all, luxury brands are supposed to be limited. By increasing production, supply of the vehicle will be larger, reducing the exclusivity people feel when they purchase it. So, even the company’s plan to increase revenue and earnings to match their overwhelmingly high IPO is a bad bet.