VOLCAR B: Execution Risks Will Limit Upside As Competitive Pressures Persist

Key Takeaways

• Intense EV competition, regulatory uncertainty, and trade barriers are pressuring margins, revenue growth, and cash flow.
  
• Heavy investment needs and Chinese market exposure heighten risks to earnings stability and capital allocation.
  
• Aggressive cost optimization, local EV production, regional expansion, and strategic partnerships are boosting margins, growth potential, and resilience against regulatory and global trade challenges.

Catalysts

Designs, develops, manufactures, markets, and sells cars in Sweden and internationally.

• Demand for Volvo's EVs remains pressured by both slower-than-expected market growth and intensifying competition from new and incumbent automakers, limiting near-term volume growth and contributing to ongoing price pressure, which is likely to negatively impact revenue and gross margins.
  
• Rising trade barriers and tariffs-especially on China-produced vehicles-have forced costly production localizations and asset impairments, while also threatening profitability and cash flow due to increased operating costs and margin compression.
  
• Ongoing geopolitical instability and regulatory uncertainty around emissions standards necessitate costly compliance investments and supply chain adaptations, which could further strain net margins and delay earnings improvement.
  
• Elevated investment needs for electrification, new technologies, and capacity expansions are suppressing free cash flow and delaying the timeline to return to sustainable cash generation, heightening risks to earnings and capital allocation.
  
• Volvo's high exposure to the Chinese market for both sales and manufacturing leaves it vulnerable to economic and policy shocks, adding uncertainty to top-line revenue growth and contributing to volatile future earnings.

Volvo Car AB (publ.) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Volvo Car AB (publ.)'s revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach SEK 17.7 billion (and earnings per share of SEK 6.87) by about July 2028, up from SEK 403.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK7.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.9x on those 2028 earnings, down from 151.7x today. This future PE is lower than the current PE for the SE Auto industry at 83.3x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.11%, as per the Simply Wall St company report.

Volvo Car AB (publ.) Future Earnings Per Share Growth

Risks

• The successful ramp-up of locally produced EV models like the EX30 and upcoming EX60, supported by advanced cost-saving technologies (mega casting, cell-to-body, in-house e-motors), positions Volvo for improved margins and increased volumes as tariffs and supply chain issues are mitigated; this may drive topline revenue growth and strengthen net margins over the medium term.
  
• The SEK 18 billion turnaround program, including significant variable and indirect cost reductions and a sharp focus on working capital and CapEx optimization, is already yielding strong positive cash flow; if fully implemented, these initiatives will structurally lower the company's cost base, supporting a recovery in profitability, free cash flow, and earnings.
  
• Expansion in key regions such as China and the U.S.-particularly through increased local autonomy, new product offerings tailored for local demand, and manufacturing regionally (e.g., moving XC60 production to Charleston)-could drive a return to volume growth and enhance overall revenue, reducing the risks associated with global trade tensions and tariffs.
  
• Strategic partnerships with Geely (platform sharing, part/component procurement) and Polestar (joint engineering and manufacturing) are creating new growth opportunities, enhancing Volvo's technological differentiation, broadening its product portfolio, and enabling lower R&D and procurement costs, which could improve gross margins and operating leverage.
  
• Profitability from emissions credit sales in Europe, coupled with a strong pipeline of electrified products, provides additional recurring revenue streams, while stricter EU fleet emission standards offer ongoing margin uplift; this bolsters earnings resilience as regulatory headwinds for combustion vehicles intensify across the industry.

Valuation

• The analysts have a consensus price target of SEK17.76 for Volvo Car AB (publ.) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK20.1, and the most bearish reporting a price target of just SEK14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK413.0 billion, earnings will come to SEK17.7 billion, and it would be trading on a PE ratio of 3.9x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of SEK20.62, the analyst price target of SEK17.76 is 16.1% 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.