VOW3: Chinese EV Competition Will Pressure Margins And Limit Upside Potential

Narrative Update on Volkswagen

We trim our Volkswagen fair value estimate to EUR 85 from EUR 90. This reflects analysts' mixed but cautious stance as they balance rising revenue growth and slightly stronger margins against a higher discount rate and lingering sector headwinds around tariffs, Chinese competition and EU regulation.

Analyst Commentary

Recent Street research on Volkswagen reflects a more cautious tone despite a still-supportive long term fundamental view. While headline ratings remain largely Neutral to positive, the adjustment in price targets points to rising concern that execution risks and structural headwinds could cap upside versus prior expectations.

Bearish analysts highlight that the sector is entering a more challenging phase, with intensifying Chinese competition, uncertainty around battery electric vehicle adoption and a more complex regulatory and tariff backdrop in Europe and the United States. These factors are seen as potentially weighing on Volkswagen's volume growth, mix and pricing power, even as management continues to pursue cost efficiencies and a more focused product strategy.

At the same time, some large houses such as Goldman Sachs see Volkswagen and its German peers as undervalued relative to their premium positioning, arguing that current industrial stub valuations already discount a severe downturn scenario. This creates a tension in the narrative, with valuation support offset by growing worries that the group may struggle to fully convert its strategic initiatives into sustained margin expansion and higher free cash flow generation.

Bearish Takeaways

• Multiple bearish analysts have trimmed price targets, signalling lower medium term growth and profitability assumptions and reinforcing concerns that Volkswagen may find it difficult to fully offset rising input, compliance and electrification costs.
• The cautious Neutral stance from Goldman Sachs, coupled with only modest upside to its price target, underscores fears that competitive pressure from Chinese manufacturers and ongoing BEV investment needs could constrain returns on capital and depress valuation multiples.
• Downward target revisions reflect increased uncertainty around execution on the transition to electric and software defined vehicles, with risk that delays, higher capex or slower take up could limit margin improvement and keep the shares trading at a discount to historical averages.
• Even with select upgrades, the broader tone of research emphasizes that regulatory, tariff and FX risks could erode earnings visibility, leaving Volkswagen vulnerable to further estimate cuts if macro conditions or the pricing environment deteriorate.

What's in the News

• Volkswagen is being sued by Perrone Robotics, which alleges the company’s automated driving software stacks infringe patents covering general purpose robotics operating systems used in autonomous vehicles (Perrone Robotics legal filing).
• Volkswagen reaffirmed its group earnings guidance for 2025, indicating that sales revenue is expected to remain broadly unchanged from the prior year (company guidance).
• Volkswagen says technology from its joint venture with Rivian could ultimately be deployed in internal combustion engine vehicles, as it works to unify software and electronics across brands amid ongoing Cariad delays (Reuters).
• Volkswagen has begun developing its first in house AI chip through a Cariad and Horizon Robotics joint venture, aiming to deliver more advanced driving features and regain competitiveness in China (Financial Times).
• Volkswagen’s CEO indicated the group currently has sufficient chip supplies but warned that the broader semiconductor situation remains fragile and called for a swift political solution (Reuters).

Valuation Changes

• Fair value estimate was reduced slightly to €85 from €90, reflecting a modestly more conservative outlook despite improved operating assumptions.
• The discount rate increased slightly to 9.98% from 9.81%, indicating a marginally higher required return and risk premium applied to future cash flows.
• Revenue growth was revised up significantly to roughly 98% from 53%, suggesting a meaningfully stronger top line trajectory in the updated model.
• The net profit margin was raised slightly to about 3.99% from 3.77%, implying a modest improvement in expected profitability.
• The future P/E was lowered moderately to about 4.22x from 4.80x, pointing to a cheaper valuation multiple applied to forward earnings.