Motley Fool Hidden Gems Investing - Has Ferrari Lost Its Mind?

Starting point is 00:00:00 Can Ferrari go all electric? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoy. I'm joined today by Lou Whiteman and Matt Frankel. And guys, one of the big items over the weekend that I think we got to start with is Ferrari introducing their all electric Luce, if I'm saying that correctly. We have a pizza luce down the street for me not probably not related uh but this is something that we've seen at least the guts of uh johnny ives company love from design some of the internals so we saw a little bit of that but we actually saw the outside the reaction from the media from you know influencers and people like that matt was not all that positive so what do you think about

Starting point is 00:00:51 ferrari making this step into the ev space i mean i i could have told you before they made this product announcement that the market was going to react negatively because it's going to be really tough for Ferrari to differentiate itself in the EV space. The company's own executives seem to think that this is the future of the company and I don't buy it. People buy Ferraris for specific reasons. One, they sound different than every other car on the road. They have race car-like handling, which is almost impossible with an EV because your batteries weigh 2,000 pounds. I mean, there's a lot. People who buy Ferraris don't care about being able to drive 3 000 miles in a clip the average ferrari goes about 2 000 miles a year um you know or being

Starting point is 00:01:30 able to they're not actually for driving as much as they're probably very fun to drive i've driven on once but uh they they are more of kind of a showcase than anything else yeah i think i was there when you drove your ferrari uh yes that's right uh and being able to carry five passengers in their luggage no one buys a ferrari for that especially a six hundred thousand dollar upscale version. And with EVs, being able to do zero to 60 in two and a half seconds is not a differentiator. You could do that with a Tesla Model S Plaid for one-fifth of the price, less if you buy one used. It's not as much of a differentiator as it is when you're buying a sports car. A Ferrari sports car is noticeably faster than a Camaro. It's not noticeably faster than my wife's Cadillac EV

Starting point is 00:02:14 because it has instant power delivery. So I feel like the market's reaction is correct in that the EV Focus is a bit of a misstep for Ferrari. The plug-in hybrid they released not long ago was a big success. And I think that's really the direction they're going to end up going. Yeah, Lou, what's so interesting about this is the design is so different than most Ferraris. And we've seen this before. If you remember Porsche, when they came out with their SUVs, that was actually a huge success for them. Financially, that arguably saved the company. but this one almost seems to go a little further in that direction i said in our show notes that it reminds me of apple's unapologetically plastic iphones it kind of has that sheen to it uh so it

Starting point is 00:02:58 just seems like it's so far off that that's what's throwing people off that all said i still kind of like it yeah you know matt matt saw this reaction coming i didn't because to be honest i'm surprised investors care. This, to me, feels like a placeholder. You're a European automaker. You're an automaker in general, but especially a European automaker. You have to have something in this segment, period, just so the politicians don't bug you when you call them up. I don't think this is a needle mover. If they really want to move the needle, they should start fulfilling some of their wait list, which has been their problem. But look, I'm not going to say that there isn't a market for five passengers with luggage, I wouldn't have thought the Porsche

Starting point is 00:03:43 Cayenne would work either. There are people who will pay ridiculous amounts to brag about what they're really, when they're just buying a, the Cayenne kind of looks like the Kia, if you ask me, in a lot of ways. But, you know, so there is always a market out there for this maybe. But for the most part, you know, they're not trying to differentiate there. They're not trying to do anything more than check the box, get something in this market, and then let it evolve from there. Ferrari's big differentiator is that they have the best in class margins. They don't lose money on new models. They do a great job of keeping demand just ahead of supply, even on all their new model launches. And like we said, they have a giant wait list for most of their models.

Starting point is 00:04:28 And the Porsche Cayenne was not a $700,000 vehicle, is a big thing to point out. Much more mass market than Ferrari has ever been. Right, and I don't have the number in front of how much they spent developing this, but I think the investor reaction is that it won't produce the kind of margins that Ferraris used to, that they're not gonna get the ROI on that spending

Starting point is 00:04:47 that they do on like the plug-in hybrid, which sells for, I think like $800,000 and has a long wait list. So that's really what we're seeing here, that they're not gonna get the ROI on their spend, not just the look of the vehicle, but just that they're not gonna make their money back. this is such a r&d intensive industry and again i don't know how they can avoid i mean nothing

Starting point is 00:05:09 matt said is wrong but i i think it misses just the reality if you have to be doing something here and doing some of their terms you know i i i don't know i if if the market was surprised by this i i think the market's got better gripes with ferrari right now than this i'll just say that then maybe their f1 team did have a pretty good weekend at least with lewis hamilton so maybe that's not something that they're griping about um lou mercedes also came out with a concept that's not as close to production as it seems like the the lucha is but is that something that it's not quite as off the kind of traditional style of a mercedes vehicle is that maybe going to be a little bit more successful or does that even matter is it just this this placeholder that

Starting point is 00:05:54 You need to kind of check the box and say you're involved in EVs, but you're not necessarily looking to sell a lot of these. Kind of same answer, but I do think there's probably more opportunity for sales there just because of the nature of their customer. Look, I looked at that one too, and that looked like my neighbor's Audi. So I don't know how you really differentiate yourselves anymore. And to be honest, I mean, you know what differentiated itself in the market was the Cybertruck. So maybe differentiating shouldn't be your number one goal.

Starting point is 00:06:23 Look, of the two, I think the Mercedes can sell more, but I actually think Ferrari could turn theirs into a higher margin thing. 20% or so of that high margin is customization. That has always been Ferrari's superpower. They designed the Luce for that. if they can, you know, if the world moves towards EVs and they have at least a concept in place that they can get some of those Ferrari type customizations mods on, I think this could be a success. But no, I mean, again, I don't think you can invest on it today. I think you invest on whether or not they can fulfill their backlog. The people who are giving Ferrari flack today are

Starting point is 00:07:02 probably also not the people who are going to be buying a Ferrari or making those customizations. The answer is going to be, who's the billionaire, the several hundred millionaire who was willing to drop, you know, $800,000, a million dollars on a new electric vehicle to differentiate themselves from the crowd? I think those people will be out there. When we come back, we're going to turn ourselves to why the market is up today. And that has to do with Iran. You're listening to Motley Fool Hidden Gems Investing. In Toronto, every arrival is a statement and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025.

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Starting point is 00:08:19 seems like we're going back and forth on this on an almost a daily basis but the market continues to react and so i wanted to get your thoughts on whether this is something is this nothing is the current situation where oil prices now $94 a barrel, at least WTI, that seems like it's going to continue to trickle its way through the economy. So how should investors be thinking about this kind of back and forth with the stock markets and the real data that's coming out that's showing that gas prices are high for longer than we expected and inflation may be a little bit sticky? It seems like the difference this time is both sides seem to think that they're talking this time and previous announcements apiece, maybe we're more one-sided. I do think we should wait

Starting point is 00:09:01 and actually see what happens before we assume, but the market doesn't agree with me there. So the market is up on this assumption. It would help. It definitely would help. You've mentioned oil prices are trending down, but more importantly, what we've learned from this is oil prices don't matter so much as the refined products and the products that come out of oil. That's going to take time. Gas didn't spike up. Gas has trickled up the last few months. I don't think there's any reason to think that it won't, that that same thing won't happen on the way down. There's plenty of unknowns here. Even if the Strait is actually opened, we still need ship captains to test that the Strait is open. I mean, look, we talk about this like a commodity. There are human

Starting point is 00:09:44 beings about to sail through that, you know, so it tends to open up slower. If the Red Sea is any guide, it tends to open up slower than what you think. How much damage was there to the infrastructure? Normalization on oil flows is going to take months, if not years. I don't think the economic impact on reopening will happen any faster. An immediate knee-jerk reaction is what we might see if we get a deal. And just looking back, when we had that two-week ceasefire deal that was announced in April, oil prices crashed by about 16% the next day. But lower and, quote, back to where we were are two very different things. As Lou mentioned, there are the numbers over 800 tankers that are stuck in the Strait of Hormuz that need to get moving. You know,

Starting point is 00:10:31 supply chains, shipping routes, energy infrastructure, that's not just going to snap back overnight. Economists widely expect oil prices to stay above pre-war levels till the end of the year, even if a deal is reached. And same goes for inflation. I don't expect it to snap back to 2% immediately. And not just because of energy prices. I mean, peace deal is, it's a positive catalyst for lower inflation, but it's not deflationary. So it's really important to differentiate between those two terms. Matt, this reminds me of when we talked about inflation coming out of COVID being transitory. And what do you do if you're the Fed if inflation is transitory? It turns out it was kind of transitory, but that transitory lasted

Starting point is 00:11:16 a while. It was not a, you know, spikes up for six months and then comes back down to where it was. I think it was like a two year span. We raised interest rates tremendously. Is this what you would expect to see is, hey, yeah, maybe this is the beginning of the end of this conflict and the economic impacts, but we're going to be feeling this for quite a while. Yeah. I mean, I'm pretty sure Jerome Powell wishes he could take that word back transitory when he said it. We never we've we still have not gotten back to the two percent target. It's worth mentioning even now. You know, inflation was the highest it's been since 2023 last month. And it's not just energy. There are other contributing factors as well. I mean, when we came into 2026,

Starting point is 00:11:59 I thought tariff uncertainty was a thing of the past. And then, boom, it just shot back up. So it's not just the energy price inflation. But no, I think it's going to take a little longer to cool off. I think the Fed's going to be a little bit more deliberate in acknowledging that it's going to take a little longer to cool off than they had been before. I still think over the next two years, that the general direction of inflation and interest rates is lower, but it's going to be a much more steady and slow decline than a lot of people think. Yeah. And maybe lower and from the peak, but I don't, I question what the forces are that's going to really push, put pressure on rates and put pressure on inflation. We talked, I mean, wouldn't it be great, Travis, if we could just go

Starting point is 00:12:44 back to talking about things like the deficit and stuff like that as driving things. But It is really, really hard to see the bond market believing that we are in a above-average credibility market, even if all of these external factors go away overnight. I think more normalized inflation relative to the beginning of this decade should be expected. Is it down from the highs? Probably. But we aren't going anywhere near the lows.

Starting point is 00:13:16 And if anything, I think we should learn to live what we've had the first few months of the year. I think this is going to feel more normal than a few years ago. Yeah, and we are stock investors. But just a reminder that bond investors run about 10 times more money. The bond market is much, much bigger than the stock market. So it is important from time to time to listen to what they're telling us with what's going on with rates.

Starting point is 00:13:40 And it seems like those expected rates are going higher, at least later this year. Something to keep an eye on for investors. When we come back, we're going to talk about a potential slowdown in AI spending from some of the big tech companies you're listening to. Motley Fool, Hidden Gems, Investing. and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on nespresso.com when you're a mid-sized business you need every competitive advantage you can get like an ai solution that works for you not against you sap grow is built with ai embedded at its core

Starting point is 00:14:40 working across every system and it's ready to go from day one so you can hit the ground running bring it with sap grow ai cloud erp for any size business welcome back to money fool hidden gems investing ai has obviously been the talk of the market over the past few years and this year it is what's driving a lot of stocks higher particularly in semiconductors and all the big capex spending but over the last few days and particularly over the weekend, we got some indications from some pretty big names in artificial intelligence that maybe the payoff that they were looking for is not necessarily there. Matt, Uber, Valve, and Duolingo were three of the companies that have at least given us indications. I think Uber was kind of

Starting point is 00:15:25 the most vocal, but indications that, hey, we're spending a lot of money on AI. We don't know that there's a real ROI there. So are we at a new phase where the token consumers, which are these companies, are questioning, hey, is there really a payback here? Yeah. And to be clear, if we see more CFOs and COOs start to question their AI spend, that's a generally good thing. No one wants the companies they invest in to waste money. It's a good thing overall. Uber, just to kind of add a little bit of context. Their COO, he publicly admitted that the company cannot show a clear connection between how much they're spending on AI tokens and how much value they're getting out of it. Just the numbers. Uber has about 5,000 engineers, each of which are spending between

Starting point is 00:16:13 $500 and $2,000 a month on AI tools, depending on what source you're looking at. I mean, that's millions of dollars a month with no clear payoff yet. And this is not to say we're in an AI spending bubble. It's the use cases for AI are different depending on what your business is. I mean, just for example, financial services, that's an area that I follow very closely. If you can use your AI tokens to automate document processing, to automate loan approvals, things that you would normally have to pay somebody to do, you can more clearly show an ROI on what you're doing. So there are applications in the retail space to automate certain processes, logistics space so basically if you can use your your ai tokens to automate processes and reduce

Starting point is 00:17:05 labor costs and show clearly what what you're going to do with it it's a much better um you know use case than just to you know help write code and and things like that that don't don't have a clear immediate payoff and that's what we're starting to see executives question Yeah, Lou, we've also seen the word token maxing be something that people have talked about. When you put incentives in to say, hey, use more AI and maybe you'll get that promotion. Maybe you'll get a raise. The incentives, you know, show me the incentives. I'll show you the outcome. And maybe that outcome doesn't lead to a lot of ROI. Yeah. Not everybody here can be right. And I don't think we know what part is wrong. And that sort of scares me as an investor. Matt's right. It might be that just this is a good tool for some things, but not everything. But we just had a company file an IPO saying their enterprise AI total addressable market is about two thirds of total US GDP. So again, something can't be right

Starting point is 00:18:05 there. Or just AI has to get cheaper to kind of fulfill the goal. And we talked about this last week. It's actually getting more expensive. Tokens are getting more expensive. Not only is it getting more expensive, but the AI hyperscalers are companies that have traditionally enjoyed a mid-teens return on invested capital. Right now, their return is negative. So they have to either figure out how, I mean, at some point, hopefully the build-out won't go on forever, but it is going to go on for a while. At some point, they're going to have to figure out how to, I don't know, 15x the revenue they are bringing in here somehow on the same cost basis. All of this can't be true. We can't have this just as kind of select, but not everything, but it's going to take,

Starting point is 00:18:52 it's going to eat software. We can't have it, well, it needs to get cheaper, but the hyperscalers need to generate this ROIC. We don't yet know which way it breaks, but mark my words, something is going to break here. Not everything the market believes right now and not everything we are seeing as a trend can be true at the same time. There's a tension there. That tension will resolve itself at some point. Yeah, definitely something that we're trying to figure out exactly what's going on. We've covered this a few times on the show and kind of the different angles with the build out with what is the ROI? What are customers saying? Where's the real payback? And I think we may be entering a different phase. We saw last week, some of these hyperscalers increasing their

Starting point is 00:19:37 prices. That's telling you that they're thinking about the economics of their business. Now you hear Uber say, you know what? Maybe we're spending too much on tokens. They're thinking about the economics of their business. So that can be good for some of those players, but there's definitely not going to be some players that aren't going to like this willy nilly spending. So something we'll be definitely covering in the future. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are

Starting point is 00:20:12 sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Matt Frankel, and Dan Boyd behind the glass, I'm Travis William. Thanks for listening. We'll see you here tomorrow. We'll see you next time.

Motley Fool Hidden Gems Investing - Has Ferrari Lost Its Mind?

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