Internal Combustion Reliance And Cost Pressures Will Erode Profitability

Key Takeaways

• Over-reliance on internal combustion vehicles and an overextended brand portfolio hinder Stellantis' adaptation to EV trends and reduce operational efficiency.
  
• Competitive pressures, rising input costs, and delays in software innovation threaten margins, market share, and long-term earnings growth.
  
• Product launches, regional expansion, and electrification investments are driving improved performance, while strong liquidity and proactive debt management reduce financial risk and support future growth.

Catalysts

Engages in the design, engineering, manufacturing, distribution, and sale of automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, mobility services, and production systems worldwide.

• Stellantis' heavy reliance on internal combustion engine vehicles, particularly in North and Latin America, puts it at a structural disadvantage as emissions regulations and consumer preferences shift rapidly toward electric vehicles worldwide, which will likely continue to put downward pressure on revenue growth and operating margins as ICE sales erode faster than the company can scale profitable EVs.
  
• Margin compression is set to persist as the company faces mounting input cost pressures from rising raw material prices, unpredictable battery supply chains, and significant tariff headwinds, with the CFO confirming expected total tariff impacts between 1 billion and 1.5 billion euros for 2025, directly undermining both net margins and earnings for the foreseeable future.
  
• Stellantis' over-diversified portfolio of 14 brands significantly dilutes its R&D and marketing focus, leading to high fixed costs and scale inefficiencies that impair its ability to compete with more agile, technology-focused rivals; this sustained inefficiency puts long-term net margins at risk and hinders meaningful earnings growth.
  
• Accelerating global competition from new EV entrants, especially well-capitalized and technologically advanced Chinese manufacturers, is likely to force sustained price reductions, eroding Stellantis' market share in core regions and further dragging down both revenue and profitability as competitive pressure intensifies over the long term.
  
• Persistent lags in the adoption and commercialization of advanced vehicle software, digitization, and connected car platforms will leave Stellantis behind competing automakers who are already capturing lucrative high-margin recurring revenue streams, further impairing Stellantis' future earnings potential and ability to support free cash flow generation.

Stellantis Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Stellantis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Stellantis's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.5% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach €5.1 billion (and earnings per share of €1.76) by about July 2028, down from €5.5 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 4.4x on those 2028 earnings, down from 4.5x today. This future PE is lower than the current PE for the GB Auto industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 2.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.43%, as per the Simply Wall St company report.

Stellantis Future Earnings Per Share Growth

Risks

• Stellantis reported sequential improvement in volumes, revenues, AOI margin, and reduced cash flow outflows compared to the previous half year, suggesting operational and financial performance may be on an improving trend, which could support future earnings recovery.
  
• The company has launched several new products, particularly in Europe's B and C segments, and plans to continue this product wave-including new STLA Medium models and the return of the Jeep Cherokee in North America-potentially driving higher future revenues and market share.
  
• Stellantis is experiencing strong growth in the Middle East and Latin America, regions with favorable demographics and rising affluence, which could provide meaningful positive operating leverage and support margin expansion in the long run.
  
• Investments in BEVs and affordable battery technology have already begun to lead to higher BEV penetration in Europe, and Stellantis claims to be making money on these vehicles, indicating potential for sustained revenue and profit growth as electrification accelerates.
  
• The company maintains a robust liquidity position, targeting 25% to 30% of trailing twelve-month revenues, and has proactively refinanced debt under favorable market conditions, which lowers financial risk and supports balance sheet strength, mitigating net margin and earnings volatility.

Valuation

• The assumed bearish price target for Stellantis is €6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Stellantis'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 €14.0, and the most bearish reporting a price target of just €6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €158.2 billion, earnings will come to €5.1 billion, and it would be trading on a PE ratio of 4.4x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of €8.6, the bearish analyst price target of €6.0 is 43.3% lower.
  
• 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.