Rising Tariffs And Fierce Global Rivalry Will Erode Wind Margins

Key Takeaways

• Rising cost pressures, persistent supply chain challenges, and intensifying competition threaten to diminish profitability and constrain long-term cash flow.
  
• Technological alternatives and project execution risks may cap future growth, while prolonged offshore challenges could delay margin and earnings recovery.
  
• Strong global wind energy demand, expanded services, regional localization, and technological leadership position Vestas for stable, recurring earnings and improved long-term profitability.

Catalysts

Engages in the design, manufacture, installation, and services of wind turbines the United States, Denmark, and internationally.

• Mounting cost pressures, including increased tariffs, persistent offshore ramp-up expenses, and rising depreciation and amortization, threaten to erode profitability even as Vestas increases revenues, putting sustained pressure on net margins and overall earnings well into the medium term.
  
• Intensifying global competition, especially from lower-cost Chinese manufacturers, is likely to force Vestas into price wars in both onshore and offshore wind markets, leading to lower average selling prices and diminishing gross margins over the long run.
  
• Ongoing supply chain volatility, regional protectionism, and input cost inflation for key materials like steel and copper could become structural headwinds, causing continued project delays, margin drag, and higher working capital requirements which will constrain free cash flow generation.
  
• Technological disruption from alternative energy solutions-such as more cost-effective solar coupled with scalable storage-poses a growing risk that future renewable energy investments will shift away from wind, capping order intake and long-term revenue growth for Vestas.
  
• Execution and cost overrun issues in new offshore projects, compounded by long permitting cycles, grid integration challenges, and failure to deliver expected cost benefits from scale-up initiatives, may result in sustained negative EBIT in Power Solutions and delay the recovery in group-level margins and earnings per share.

Vestas Wind Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Vestas Wind Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Vestas Wind Systems's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.1% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach €832.2 million (and earnings per share of €1.27) by about August 2028, up from €762.0 million 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 16.6x on those 2028 earnings, down from 20.2x today. This future PE is lower than the current PE for the GB Electrical industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 5.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Vestas Wind Systems Future Earnings Per Share Growth

Risks

• Sustained global demand for wind energy, driven by ongoing decarbonization, electrification, and rising electricity needs in key markets like the US and EU, could lead to steady order intake and support long-term revenue growth for Vestas.
  
• Vestas' expanding service and maintenance business, with an 11-year average contract duration and a €36 billion order backlog, provides high-margin, recurring revenue streams that could stabilize earnings and enhance profitability over time.
  
• Improving permitting processes, growing repowering opportunities in Europe, and grid investments across core regions are expected to support project volume, helping to increase Vestas' sales and elevate company revenues.
  
• The company's investments in manufacturing scale and supply chain localization-especially in the US and Poland-position Vestas to meet demand efficiently, mitigate tariff risks, and enhance gross margins and overall project economics.
  
• Continued leadership in offshore wind, the ramp-up of serial production, and the integration of digital and hybrid solutions are likely to unlock new market segments, support higher average selling prices, and improve net margins and long-term earnings potential.

Valuation

• The assumed bearish price target for Vestas Wind Systems is DKK71.18, which represents two standard deviations below the consensus price target of DKK139.07. This valuation is based on what can be assumed as the expectations of Vestas Wind Systems'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 DKK196.09, and the most bearish reporting a price target of just DKK60.03.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €22.1 billion, earnings will come to €832.2 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of DKK114.85, the bearish analyst price target of DKK71.18 is 61.3% 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.