Decarbonization And Digital Trends Will Redefine Emerging Mobility Markets

Key Takeaways

• Accelerated electrification, cost reduction, and automation are set to drive margin improvement and establish industry benchmarks in affordability and profitability.
  
• Expansion in digital services, premium brands, and emerging markets will fuel recurring high-margin revenue and sustained operating profit growth.
  
• Margin pressure, high compliance costs, intense EV competition, and legacy fixed costs are straining profitability and financial flexibility during Volkswagen's shift to electrification.

Catalysts

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

• While analyst consensus expects robust growth in BEV sales and margin improvement as cost reductions kick in, the unprecedented scale and speed of Volkswagen's electrification offensive-especially the upcoming ID.EVERY1 at a €20,000+ price point and ID.2 family with breakthrough LFP battery tech-could generate a step-change, not just in unit sales but also in gross margins, enabling Volkswagen to set industry-wide affordability benchmarks and achieve true BEV-ICE margin parity years ahead of expectations.
  
• Analysts broadly agree restructuring and headcount reductions will gradually offset BEV margin dilution, but management's accelerated execution and the ongoing automation and digitalization of manufacturing could drive cost per unit dramatically lower, supporting unexpectedly rapid and lasting net margin expansion throughout the group.
  
• Volkswagen's early-mover, integrated zone architecture and expansion of localized software (notably in China) position it to capitalize on the exponential growth of high-margin digital services, connectivity, over-the-air updates, and autonomous feature sales-establishing an annuity-like, software-driven revenue stream that could add billions in recurring income and raise group operating margins.
  
• The surge in high-value vehicle demand from urbanizing emerging markets-with Volkswagen's multi-brand presence and focus on tailored, market-specific models-gives the group a unique pathway to sharply accelerate volume growth and bolster average selling prices across a diversified portfolio, fueling outsized revenue and earnings growth relative to more regionally concentrated peers.
  
• Volkswagen's increasingly dominant premium brand portfolio (Audi, Porsche, Bentley) is poised to gain further pricing power and mix benefits as electrification and connectivity raise luxury segment entry barriers-amplifying upward pressure on group blended net margins and driving sustained growth in group-level operating profit.

Volkswagen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Volkswagen compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Volkswagen's revenue will grow by 3.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.9% today to 5.5% in 3 years time.
• The bullish analysts expect earnings to reach €19.6 billion (and earnings per share of €37.81) by about July 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 bullish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, up from 5.1x today. This future PE is lower than the current PE for the GB Auto industry at 6.6x.
• 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

• The rapid ramp-up of battery electric vehicle (BEV) sales is currently diluting margins, as Volkswagen's BEV profitability remains "significantly below" that of its internal combustion engine (ICE) cars, putting persistent pressure on group operating profit and margin over the next few years.
  
• High compliance costs related to climate regulations are squeezing margins and requiring substantial provisions, evidenced by a 600 million euro booking for CO2 penalties, with additional regulatory risks potentially increasing costs and eroding future earnings.
  
• Volkswagen continues to suffer from declining sales and profits in China due to fierce competition, volume loss, and ongoing price pressure, risking the stability of its largest market and undermining overall group revenue and operating results.
  
• Intense global competition, especially from EV leaders and new entrants, has led to heavy incentives for BEVs and price wars in both China and Europe, keeping pricing power weak and making revenue growth and margin improvement difficult to achieve.
  
• Despite restructuring, Volkswagen's legacy high fixed costs and capital investment requirements in both ICE and EV product lines are weighing on net cash flow and reducing financial flexibility during the demanding transition to electrification and digital technologies.

Valuation

• The assumed bullish price target for Volkswagen is €155.72, which represents two standard deviations above the consensus price target of €115.0. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €356.8 billion, earnings will come to €19.6 billion, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 9.9%.
• Given the current share price of €95.52, the bullish analyst price target of €155.72 is 38.7% 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.