Regulatory Burdens And Mobility Shifts Will Erode Margins

Key Takeaways

• Accelerating shift to mobility-as-a-service and heightened competition in EVs threaten Volkswagen's core business, margins, and long-term revenue growth.
  
• Rising compliance and electrification costs, along with geopolitical risks, pressure net income and competitiveness against global peers.
  
• Strong EV growth, cost efficiencies, and tech investment position Volkswagen for robust profitability and global revenue stability amid evolving industry and regulatory landscapes.

Catalysts

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

• If the global shift from car ownership to mobility-as-a-service materially accelerates, Volkswagen's core business model faces long-term headwinds, potentially leading to a sustained decline in sales volumes and underutilization of its manufacturing footprint, placing both revenues and plant-level margins at risk.
  
• Persistently stringent emission and regulatory standards, particularly in the EU, U.S., and China, are likely to escalate compliance costs and require significant and ongoing investment in new technologies and retrofitting older models, pressuring net margins and capital allocation for growth.
  
• The company's heavy investments in electrification and digital transformation have resulted in high fixed costs, yet the ramp-up of battery electric vehicles has been margin-dilutive so far; if brand and product differentiation do not improve, future revenues and overall group earnings could erode as competition intensifies.
  
• Volkswagen's earnings remain highly vulnerable to geopolitical and trade risks-continued or even increased U.S. import tariffs would represent a structural headwind, with direct P&L impact already exceeding one billion euros in a single half-year and an ongoing drag on free cash flow and net income.
  
• Global industry competition is escalating, with traditional automakers, Chinese players, and technology entrants converging on EVs and mobility-as-a-service; if Volkswagen fails to achieve cost parity, competitive battery tech, and cutting-edge software, its long-term revenue growth trajectory and ROIC could materially lag peers, especially as demand volatility rises.

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 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 3.7% in 3 years time.
• The bearish analysts expect earnings to reach €12.2 billion (and earnings per share of €24.26) by about August 2028, up from €8.4 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 4.9x on those 2028 earnings, down from 5.7x today. This future PE is lower than the current PE for the GB Auto industry at 8.4x.
• 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 9.81%, as per the Simply Wall St company report.

Volkswagen Future Earnings Per Share Growth

Risks

• Volkswagen's electric vehicle (EV) business is gaining strong momentum with battery electric vehicle deliveries up 47% and a growing BEV order backlog, while the company holds a leading EV market share in Western Europe at 28%, which could drive robust revenue and long-term earnings as electrification accelerates globally.
  
• The group's cost reduction and restructuring programs are beginning to deliver measurable improvements, including significant workforce reductions, material cost savings, and a clearly stated expectation of annual savings exceeding 4 billion euros, which is likely to enhance net margins and support future profitability.
  
• Volkswagen's product offensive across brands is driving positive order intake, up 19% in Western Europe with BEV orders increasing by 62%, and a backlog well into the fourth quarter, providing a strong foundation for stable or rising revenues.
  
• Investment in autonomous driving, connected vehicle platforms, and digital services, such as the Level 4 autonomous ID. Buzz and recurring software/service revenue via Cariad, positions Volkswagen to benefit from long-term secular trends in mobility technology, which could create new profit pools and support higher earnings.
  
• The company's ongoing expansion and localization in key markets like China and the US, with investments in local production, a new engineering center in Hefei, and deep partnerships (e.g., with Rivian), increases Volkswagen's resilience to supply chain and regulatory risks and may support sustained revenue growth and cash generation globally.

Valuation

• The assumed bearish price target for Volkswagen is €90.0, 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 €172.0, and the most bearish reporting a price target of just €90.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €328.8 billion, earnings will come to €12.2 billion, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €95.38, the bearish analyst price target of €90.0 is 6.0% 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.