Is This Supercharged Auto Stock a Better Buy Than Tesla Over the Next 5 Years?

Key Points

• Macro and industry forces have led to negative growth and shrinking profitability for Tesla.

• There's a thriving auto business that deliberately limits its supply, which supports pricing power and incredible margins.

• Tesla's valuation is currently at a sky-high level, which is a bearish signal.

• These 10 stocks could mint the next wave of millionaires ›

Tesla (NASDAQ: TSLA) deserves a ton of credit for disrupting the auto industry. Its lineup of electric vehicles (EVs) has made it a highly regarded brand known to be at the cutting edge of design and innovation. Shares have performed very well in the past, although they trade 30% below their peak (as of Aug. 22).

Maybe it's time for investors to look elsewhere. Is this other auto stock, which has climbed 143% in the past five years, a better investment than Tesla over the next five years?

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Image source: Getty Images.

The bear case for Tesla

Tesla might be a trillion-dollar business these days, but there's no shortage of reasons for investors to worry. Growth has taken a hit, with deliveries and revenue down 13% and 12%, respectively, year over year in Q2 (ended June 30). Higher interest rates don't help, as they make cars less affordable. What's more, competition remains stiff; Tesla is no longer the only EV game in town, with both domestic and international rivals making their presence felt in the industry.

Management has cut prices to maintain volumes, which eats into profitability. Tesla reported an operating margin of 16.8% in 2022. During the latest quarter, this metric fell to 4.1%. That's not a trend that investors want to see.

Of course, the long-term thesis rests on Tesla introducing a global robotaxi service. If executed successfully, this could be a financial boon. But as things stand right now, the future is highly uncertain, with questions remaining about technical progress, regulatory changes, and user adoption.

Bringing luxury to the auto sector

It might be a good idea for investors to turn their attention to Ferrari (NYSE: RACE). This isn't your typical car company. It's essentially a top luxury brand that sells extremely expensive vehicles, with some models going for millions of dollars. The business intentionally keeps a limit on production and deliveries, with the main goal being to support the brand and maintain a level of exclusivity.

Ferrari sold just 3,494 units in Q2. Compare this to a mass-market automaker like Ford, which sells a much greater number of vehicles. Even Tesla, which is a premium brand, sells far more cars than Ferrari.

Ferrari's growth isn't turning heads, but it's solid and dependable. Revenue increased 4.4% during the second quarter, and it was 82% higher than in the same period of 2019.

What makes Ferrari special comes further down the income statement. The company reported a Q2 operating margin of 30.9%. That's in line with well-known consumer brand Apple. And it's light years ahead of what Tesla registers.

Being able to flex its pricing power is a key strategic advantage. Ferrari can raise the prices of its vehicles, and demand will still be robust, as has been the case historically. The company is basically catering to the wealthiest people on the planet. They aren't necessarily concerned about tightening their budgets. It's all about showcasing their status, something that owning a Ferrari helps with. This should be true even in a recessionary scenario.

Ferrari shares are much cheaper than Tesla's. The former trades at a price-to-earnings ratio of 48.8, while the latter trades at a sky-high 195.5 multiple. It seems Tesla is always expensive, as investors buy into whatever Elon Musk says. This makes it a story stock. Investors might never get to buy Tesla at a bargain valuation.

To be clear, Ferrari shares aren't cheap. But given its durable performance in any economic scenario, steady growth, and incredible profits, I view it as the better stock to own over the next five years.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Tesla. The Motley Fool recommends Ferrari. The Motley Fool has a disclosure policy.