Chinese Market Risks And Supply Disruptions Will Erode EV Margins

Key Takeaways

• Downward pricing pressure and overexposure to China threaten Volvo's margins and create significant volatility in revenues and earnings.
  
• Heavy investment in electrification and ongoing supply chain disruptions are delaying profitability and increasing operational risks.
  
• Expansion of electric and hybrid offerings, regionalized production, cost-cutting initiatives, Geely collaborations, and emissions credit sales position Volvo for improved growth, profitability, and resilience.

Catalysts

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

• The ongoing global pivot toward shared mobility and ride-hailing, combined with economic instability and higher interest rates, threatens to fundamentally shrink demand for private vehicle ownership. This creates a sustained risk that Volvo's total addressable market will contract over time, thereby limiting revenue growth.
  
• Intensifying global competition from traditional automakers and aggressive EV startups is placing persistent downward pressure on pricing in the premium electric vehicle segment. As a result, Volvo faces potential erosion of gross margins and diminishing pricing power, which will negatively impact both top-line growth and profitability.
  
• The company's heavy ongoing requirements for R&D and capital expenditures-driven by the need to invest in electrification, advanced driver assistance, and autonomy-are suppressing net margins and may significantly delay meaningful improvements in free cash flow and earnings, particularly amid a slower-than-anticipated EV market expansion.
  
• Volvo's overexposure to the Chinese market as a growth engine heightens its vulnerability to geopolitical conflict, regulatory disruptions, and currency volatility, leading to increased unpredictability in revenues and earnings, while tariff penalties and trade barriers exacerbate these challenges.
  
• Persistent supply chain disruptions, especially in critical inputs like semiconductors and battery materials, alongside the rapid pace of advancements in battery and vehicle connectivity technology, will likely hinder Volvo's production volumes, increase costs, and force costly product refresh cycles-posing ongoing threats to both revenues and net income.

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

Assumptions

• This narrative explores a more pessimistic perspective on Volvo Car AB (publ.) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Volvo Car AB (publ.)'s revenue will decrease by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.1% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 9.1 billion (and earnings per share of SEK 6.16) by about August 2028, up from SEK 403.0 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 6.0x on those 2028 earnings, down from 152.2x today. This future PE is lower than the current PE for the SE Auto industry at 85.3x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.97%, as per the Simply Wall St company report.

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

Risks

• The successful launch and ramp-up of new fully electric and plug-in hybrid models-including the EX90, EX30, and the upcoming EX60 with cost-competitive and high-tech features-could allow Volvo to regain market share in the fast-growing electric vehicle segment, supporting future revenue growth and improved margins.
  
• Strategic regionalization, including increased autonomy for local teams in China and the U.S., as well as localization of production (like moving EX30 production to Europe and XC60 to Charleston), can help Volvo mitigate tariff risks, better align with local consumer demands, and unlock volume growth, strengthening both top-line and bottom-line results.
  
• The SEK 18 billion cost and cash turnaround program, already showing improvement in operating cash flow and expected to deliver substantial indirect spend and CapEx reductions by 2026, is positioned to structurally lower the company's cost base and drive margin expansion and higher free cash flow generation over the medium term.
  
• Growing synergies with Geely-including joint procurement and platform sharing-are enabling lower variable and production costs, facilitating product diversification and innovation, and supporting sustainable EBIT margin improvements over the long term.
  
• Increasing profits from CO2 emissions credit sales, particularly in Europe as regulations tighten and electrification accelerates, are providing a recurring and scalable revenue stream that boosts EBIT and cash generation, especially as Volvo's electric fleet share rises.

Valuation

• The assumed bearish price target for Volvo Car AB (publ.) is SEK14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Volvo Car AB (publ.)'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 SEK20.1, and the most bearish reporting a price target of just SEK14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK361.0 billion, earnings will come to SEK9.1 billion, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of SEK20.7, the bearish analyst price target of SEK14.0 is 47.9% 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.