Global EV Competition And Regulatory Risk Will Depress Margins

Key Takeaways

• Sustained pricing pressure, regulatory costs, and supply chain risks are eroding profitability and causing volatility in earnings and cash flow.
  
• Heavy investment needs in EV technology and regional manufacturing are depressing returns, with rising incentives further squeezing margins.
  
• Volkswagen's robust EV growth, cost efficiency measures, and targeted innovation position it for margin expansion and renewed market strength, especially in Western Europe and China.

Catalysts

Manufactures and sells automobiles in Germany, other European countries, North America, South America, the Asia-Pacific, and internationally.

• Intensifying competition from pure-play electric vehicle manufacturers and technology firms, particularly in China and Europe, is forcing Volkswagen to resort to high sales incentives on battery electric vehicles, directly eroding average selling prices and compressing group revenue growth and operating margins for years to come.
  
• Globally expanding pricing pressure for battery electric vehicles, combined with accelerating consumer preferences for shared mobility and alternative transportation, will suppress traditional private car demand, leading to a persistent decline in Volkswagen's volume sales and ongoing margin dilution as the company ramps up lower-margin BEV production.
  
• Substantial and ongoing regulatory exposure-including higher carbon compliance costs, unpredictable tariffs on imports into the U.S. and Europe, and unresolved Dieselgate litigation-will continue to generate one-off charges and provisions for penalties, resulting in structurally lower net earnings and greater volatility in free cash flow.
  
• The capital intensity of the EV and digital transformation, coupled with Volkswagen's need for major investment in regional manufacturing, new battery chemistries, and proprietary vehicle software, will hold R&D and capex at elevated levels, suppressing free cash generation and increasing leverage, thereby undermining long-term returns on invested capital.
  
• The ongoing risk of supply chain regionalization and raw material shortages for batteries, especially lithium and rare earths, will result in increased input cost volatility and the likelihood of production stoppages, creating sustained pressure on group profitability and threatening the stability of future revenue streams.

Volkswagen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Volkswagen compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Volkswagen's revenue will decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.9% today to 3.3% in 3 years time.
• The bearish analysts expect earnings to reach €10.9 billion (and earnings per share of €21.73) by about June 2028, up from €9.3 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 bearish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, up from 5.0x today. This future PE is lower than the current PE for the GB Auto industry at 6.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Volkswagen Future Earnings Per Share Growth

Risks

• Volkswagen is demonstrating strong EV order intake and robust growth in BEV deliveries, especially in Western Europe, with BEV share more than doubling and a clear product roadmap including affordable mass market models (such as the ID.EVERY1), indicating the potential for rising revenue and improved gross margins as EV adoption accelerates.
  
• The company maintains a significant order book in Western Europe (about 1 million vehicles) with order intake reaching well into the third quarter, signaling continued customer demand and potential resilience in sales and top-line revenue even amid market volatility.
  
• Aggressive focus on cost reduction, platform improvement (such as transitioning to LFP battery technology and zonal software architecture), and leaner operations is expected to offset BEV margin dilution over the medium to long term, which could stabilize or expand net margins and enhance earnings power.
  
• Ongoing restructuring, investments in proprietary software, and vertical battery integration, as well as optimized brand and product launches (with a premium focus on brands like Audi and Porsche), could drive higher profitability and operating leverage at group level in the coming years.
  
• Volkswagen's local-for-local strategy in China and rapid adaptation of competitive technology (including partnerships and faster product development cycles) is positioning the company for a rebound in market share and profitability in China as new models launch in 2026 and beyond, supporting long-term group earnings and possibly reversing current regional headwinds.

Valuation

• The assumed bearish price target for Volkswagen is €83.7, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Volkswagen's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €180.5, and the most bearish reporting a price target of just €83.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €329.0 billion, earnings will come to €10.9 billion, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €93.24, the bearish analyst price target of €83.7 is 11.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.