If you want to find unique investments, you need to look for companies that are doing something better than any of the competition, or those that are doing something that has never been done before. Both Ferrari(NYSE: RACE)and QuantumScape(NYSE: QS) fit that bill.
Ferrari has a firm grip on a large part of the world’s ultra-luxury supercar market, it even boasts a new $3.9 million vehicleand its premium offering creates juicy margins. QuantumScape could change the electric vehicle (EV) industry with its solid-state batteries, which appear to be improvements on the status quo lithium-ion batteries in almost every way possible.
Ferrari is unlike any other automaker, and QuantumScape has tantalizing potential if it can commercialize technology that no other company has delivered before. Both shares are unique.
In the spirit of Ferrari, let’s start this paragraph at 100 mph. Supercar manufacturers’ margins absolutely leave the rest of the auto industry in the dust.
There are two things to note about the chart above. First, the obvious: Ferrari’s operating margins are nearly triple those of even more impressive mainstream automakers. This is not a coincidence. It consistently posts industry-leading margins, a testament to its iconic brand, the racing heritage and technology that feeds its vehicles, and the level of exclusivity that gives it serious pricing power.
What many people may not realize about Ferrari is that there are, relatively speaking, so many collectors of its vehicles that even those who can afford one are extremely difficult to obtain, and the sales process is thorough. This is according to plan: Ferrari strategically increases its sales by a limited amount of cars each year, always keeping supply below demand. This underpins its pricing power while enabling growth.
The power of pricing leads us to the second conclusion from the chart above. The company achieves consistent improvement. Not only does Ferrari boast much higher margins than the competition, they have been increasing over time. Exceptionally high prices, brand strength and controlled costs allow Ferrari to improve its margins fairly consistently. That’s an attribute that few (if any) other automakers can claim.
Over the past 10 years, Ferrari’s total return has roughly tripled that S&P 500and the company has momentum as it unveils its latest $3.9 million supercar. Ferrari is one of my favorite and often overlooked stocks.
Pundits may throw around the term “game changer” too often, but QuantumScape is one of the few stocks that deserves it. The company’s solid-state batteries can hold more energy and charge faster than the lithium-ion batteries traditionally used in electric vehicles, and should be able to be produced at a lower cost. The problem is that no one has yet turned this type of technology into batteries suitable for powering cars that can be produced in commercial quantities.
QuantumScape has completed testing small samples of what it intends to be its first commercial product, the QSE-5, made using its “Raptor” process. The next step is its more advanced “Cobra” process, for which it has already begun ordering and installing equipment. This will be developed until 2025.
But what really intrigued investors was the company’s deal with PowerCo, a battery company Volkswagen Group. The deal creates a dedicated team between the two companies with the goal of commercializing the production of QuantumScape’s solid-state batteries. Under the agreement, PowerCo will initially have the right to use QuantumScape’s technology to produce enough batteries to power up to 500,000 vehicles each year, with the ability to double that output over time. QuantumScape will also receive upfront royalties of $130 million upon satisfactory technical progress. That cash injection gave the company enough funds to operate until 2028.
After years of slow and fairly steady progress, with a few hiccups and disappointments along the way, the battery company is getting closer to commercialization. If successful, it could turn into a profitable investment. However, there are many risks for shareholders, including the possibility that QuantumScape simply will not be able to commercially produce its batteries in the necessary quantities or consistently achieve the quality that automakers demand. It’s also possible that another company will be the first to bring a game-changing battery to market.
Anything is possible, but what we do know is that QuantumScape is making serious progress, and the expansion of its Cobra production process should only speed things up in 2025. With all that in mind, this could be a good time to open a small position in QuantumScape.
Ferrari’s returns have beaten both the broader market and those of its rivals in recent years, but the downside for investors looking at the stock today is that it trades at a lofty 52 times earnings. Despite its high value, Ferrari has a strong business and will rarely trade at a discount. I believe in the idea that if you invest in strong companies with competitive advantages, it matters less what the valuation is when you buy. Ferrari warrants a serious look from investors interested in making money.
QuantumScape is gaining momentum and could begin commercial production in a few years. He has a path to production with PowerCo and is consistently achieving his goals on schedule. Investors in QuantumScape will have to accept significant risk of losses, but a small position open in 2025 could pay off well in the long term if it can execute on its vision. QuantumScape warrants a serious look from risk-tolerant investors who believe the company will be able to commercialize its battery production as The electric vehicle industry is booming globally.
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