Is Ferrari Really Worth $12.4 Billion?

^{A version of thisarticle was originally published on Fool.com byJohn Rosevear}

WASHINGTON, DC Fiat Chrysler Automobiles (NYSE: FCAU.US) is preparing for an initial public offering of its Ferrari (NYSE: FRRI.US) subsidy, with pricing likely to occur on Tuesday and the first day of trading on Wednesday. And word on the Street is that Ferraris shares like everything else to do with the brand wont come cheap.

$1.8 million for each of Ferraris annual sales?

Bloomberg reportedlast week that the sports-car makers valuation could go as high as 11 billion euros ($12.4 billion) or about $1.8 million for each of the roughly 7,000 cars that Ferrari is expected to sell this year.

FCA plans to sell a 10% stake in Ferrari via a public offering on the New York Stock Exchange.

But they wont come cheap. Ferrari earned 389 million euros ($439.2 million) before interest and taxes in 2014 on net revenues of 2.762 billion euros ($3.1 billion). At 11 billion euros, Ferrari would be valued at over 28 times its 2014 EBIT a very hefty valuation for a carmaker.

Its an especially hefty valuation given that Ferrari seems determined to limit its own potential for growth, for good reasons.

Is Ferrari a carmaker, a luxury-goods company, or both?

FCA CEO Sergio Marchionne who is also the chairman of Ferrari has said repeatedly that the company shouldnt be valued like an automaker. Instead, he argues, it should be looked at more like a maker of luxury goods, and assigned a valuation accordingly 20 times earnings or more, versus the roughly 10-12 times earnings that is typical for a carmaker.

Theres some merit to that, up to a point. Ferrari really is selling luxury goods. Its sales volumes are limited by choice, to preserve the brands sense of exclusivity: Demand always exceeds supply. The company caps sales at around 7,000 a year and while Marchionne has hinted that the cap could be raised to 10,000 at some point, its not likely to go much higher.

Ferrari doesnt really have competitors in the same way that a mass-market automaker does. People who want a Ferrari usually want a Ferrari, no matter what Porsche or other sports-car makers may be offering. Its hard to imagine a situation (other than a protracted global economic crisis or a scandal that damaged the brand) in which Ferrari would be forced to cut prices.

But at the same time, its hard to see where Ferrari will find the growth that stock-investors typically demand.

A richly profitable company, but where will it find growth?

Theres probably a bit of growth to be had over time simply by boosting prices. Raising the sales cap a little bit at a time could also provide incremental revenue growth over several years. And Marchionne has talked of finding ways to offer other luxury goods under the Ferrari brand, although its unclear how profitable that line of business could be.

In truth, many investors will be attracted at least at first by the romance of being able to own a little bit of the greatest car brand of all. (Wall Street professionals are not immune to that romance in fact, as a group they may be more susceptible to it than most.)

But whats the case for Ferrari as a long-term investment? We may know more after the company starts its pre-IPO road show. But right now, its hard to see where the growth comes from and as much as your humble Fool loves Ferraris cars, Im still sceptical of the company as an investment.