2 Hugely Overlooked Auto Stocks With Massive Upside

The automotive industry is poised to potentially evolve more over the next decade than it has in the past 50 years -- arguably even longer.

A massive shift from internal combustion engine powertrains to electric vehicles (EVs) has also spurred the development of software-defined vehicles and driverless vehicles, and driven a rise in services and subscription offerings, which are rapidly changing how savvy investors view auto stocks as new high-margin businesses.

Investors looking to get in early on the evolving auto industry should start by considering these two stocks with massive upside potential.

No love? No problem.

Ferrari (NYSE: RACE) is a unicorn in the automotive industry with a long list of competitive advantages, lucrative margins that dwarf the industry, a powerful brand and racing heritage, and a loyal, ultra-wealthy consumer base that is less impacted by typical economic downturns, making the stock more recession-resilient. But over the past year, it has traded well below its average price-to-earnings ratio, allowing investors to buy an excellent business at a discount.

RACE PE Ratio data by YCharts

One reason for the recent pessimism surrounding Ferrari was the launch of its first full electric vehicle, the Luce, and the initial reaction to the unusual design, which was not at all flattering. Making investors more anxious was the fact that rival Lamborghini officially canceled plans for its first full-electric vehicle, the Lanzador, citing customer demand for a full-electric Lamborghini as "close to zero."

But Lamborghini's hesitation and internet backlash -- from people highly unlikely to be Ferrari customers anyway -- didn't slow Ferrari down. The company announced it has already sold every Luce it plans to build this year -- about 500 vehicles -- and it did so in less than two months, per the Financial Times. It sold out of the Luce allotment before a single one was even delivered; deliveries don't begin until October.

Ferrari's first full-electric vehicle, the Luce. Image source: Ferrari.

The Luce selling out isn't about the sales volume, but it does emphasize numerous competitive advantages that make it one of the top, if not the top, automotive stocks in the market. The Luce, with a base price of roughly $640,000, already sits near the top of Ferrari's price ladder and demonstrates the company's incredible pricing power, not to mention loyal consumers willing to buy nearly anything it produces. Branching into full EVs represents incremental volume and a bigger total addressable market, and Ferrari noted that many Luce buyers have never owned a Ferrari before.

At a time when most automakers are losing money on their EVs, Ferrari proves once again that it operates in a whole different world than traditional automakers. At its current valuation, it has plenty of upside for investors and far less risk than most auto stocks.

Big-time turnaround

Stellantis (NYSE: STLA), on one hand, appears to be an automaker nobody wants to invest in. It took massive charges on an EV strategy it pulled back on, has shed 70% of its value over the past three years, has posted seven consecutive years of annual sales volume declines through 2025, and has other issues. On the other hand, Stellantis has an excellent turnaround plan and is investing $70 billion to implement it over the next five years.

Stellantis' five-year strategic plan will have many moving parts globally. Two of the most important strategic initiatives are affordability and investing in North America, which remains its profit engine. The push for affordability comes with significant unmet demand for vehicles priced under $40,000, especially as the price of new vehicles continues to hit new record highs.

In a move that could quickly reverse its market share losses, Stellantis promised nine new North America vehicles priced under $40,000, and at least two priced under $30,000. Not only will these high-demand, more affordable vehicles help reverse market share losses, but they will also improve the automaker's poor factory utilization, which will support margin growth.

North America will be crucial to Stellantis' overall turnaround, and about 60% of the strategy's product and brand investments will be directed there to boost offerings and launch more lucrative vehicles from its Jeep and Ram brands. Stellantis is already gaining traction, with its recent launches returning the automaker's North American sales volume to year-over-year growth for the past four quarters.

Stellantis is focused on rebuilding profitability, reversing declining sales, and improving factory utilization to support margins. Because investors have drastically sold it off over the past three years, it might have the most upside amid its potential turnaround of any auto stock in the market.

Time to buy?

This is an interesting time for the automotive industry, with multiple shifts and evolving technology that is increasingly intertwined with lucrative software and even artificial intelligence (AI). Both Ferrari and Stellantis offer immense upside over the next five years, partly due to their recent sell-offs, and savvy investors looking to get into the evolution of the auto industry toward a higher-margin business would be wise to look more closely at those two overlooked stocks.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ferrari. The Motley Fool recommends Stellantis. The Motley Fool has a disclosure policy.