Modular Electric Platforms Will Fuel Global Electrification And Premium Mobility

Key Takeaways

• New modular electric and software platforms enable premium pricing, recurring software revenues, and lasting margin gains through product upgrades and digital services.
  
• Aggressive cost discipline, direct sales, localized production, and premium market demand could yield higher margins and long-term earnings quality than currently expected.
  
• Transition to electric vehicles, market challenges in China, trade tensions, overcapacity, and competitive pressures threaten profitability, premium brand position, and long-term margins.

Catalysts

Operates as an automotive company in Germany and internationally.

• While analyst consensus expects strong revenue growth from an accelerated product and electric model launch cycle, the market may be drastically underappreciating the transformative effects of Mercedes-Benz's all-new modular electric and software architectures (MB.EA and MBOS), which are poised to enable not just a higher unit volume and premium pricing, but recurring over-the-air software revenue streams and world-first vehicle upgrades, driving both revenue and structurally higher long-term margins.
  
• Analysts broadly anticipate material margin improvement from efficiency programs, yet the scale and speed of enforced restructuring, cost discipline, direct-to-consumer sales adoption, and localized production could unlock far greater operating leverage and EBIT margin upside than currently modeled, especially as global economic normalization boosts utilization rates.
  
• The rapid expansion of digital and connected services, including direct digital retail channels and autonomous driving technologies, positions Mercedes-Benz to capture a growing share of the value chain, introducing high-margin, recurring revenue streams that could significantly enhance both total revenue and earnings quality over time.
  
• Breakout demand for premium mobility in emerging markets-most notably the Asia Pacific region-combined with a reinvigorated top-end vehicle strategy and flagship brand launches, has the potential to drive sustained volume growth and price realization, lifting group revenue and improving profit mix as the upper middle class expands.
  
• Advances in flexible battery technologies, scale in electric powertrains, and early-mover advantages in electric vans for business customers give Mercedes-Benz a unique platform to boost EV adoption and lower lifetime production costs, supporting higher margins and consistent earnings resilience as the industry transitions to electrification.

Mercedes-Benz Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Mercedes-Benz Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Mercedes-Benz Group's revenue will grow by 2.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.9% today to 6.7% in 3 years time.
• The bullish analysts expect earnings to reach €10.2 billion (and earnings per share of €11.05) by about August 2028, up from €6.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 7.2x today. This future PE is greater than the current PE for the GB Auto industry at 8.2x.
• Analysts expect the number of shares outstanding to decline by 5.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Mercedes-Benz Group Future Earnings Per Share Growth

Risks

• Mercedes-Benz is facing margin compression and higher costs as it transitions from high-margin internal combustion engine vehicles to lower-margin electric vehicles, with management explicitly highlighting ongoing investments in battery technology and infrastructure, which is likely to weigh on overall net margins and long-term earnings.
  
• The company is encountering significant headwinds in its largest market, China, where subdued macroeconomic conditions, intensifying competition, and reduced pricing power are contributing to declining sales volumes and overall group revenue.
  
• Mercedes-Benz is exposed to geopolitical uncertainties and protectionist measures, particularly in the form of tariffs and trade disputes between major regions such as the EU, US, and China, which have already caused a triple-digit million euro negative impact and are expected to further pressure profitability and net income.
  
• Increased industry overcapacity, especially in Europe and China, along with more aggressive discounting from competitors, poses the risk of eroding Mercedes-Benz's pricing power and driving down average selling prices, further pressuring revenues and shrinking gross margins.
  
• The company's need to balance sales volumes, protect brand integrity, and expand into mass-market electric segments to remain competitive may dilute its premium positioning, undermining revenue per vehicle and adversely impacting long-term brand equity and profitability.

Valuation

• The assumed bullish price target for Mercedes-Benz Group is €82.97, which represents two standard deviations above the consensus price target of €60.56. This valuation is based on what can be assumed as the expectations of Mercedes-Benz Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €83.0, and the most bearish reporting a price target of just €40.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €151.9 billion, earnings will come to €10.2 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €51.04, the bullish analyst price target of €82.97 is 38.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.