Volkswagen (VWAGY) Inventory Evaluation

Fast Inventory Overview

Ticker: VWAGY

Supply: Yahoo Finance

Key Information

Business	Automible
Market Capitalization ($M)	$102,751
Worth to gross sales	0.4
Worth to Free Money Circulate	4.7
Dividend yield	4.1%
Gross sales ($M)	263,651
Free money circulation/share	$3.6
Fairness per share	$28.03
P/E	5.2

1. Govt Abstract

Volkswagen is the world’s second-largest automobile firm by income, behind solely Toyota. The Volkswagen Group consists of ten European manufacturers from 5 international locations: Volkswagen, Volkswagen Business Autos, Porsche, Lamborghini, Audi, Bentley, Ducati, CUPRA, SKODA, and SEAT.

Volkswagen is the kind of firm markets have hated for many years. Capital intensive, “outdated trade”, polluting, based mostly outdoors the US. Making automobiles has undoubtedly not been glamourous currently except you make electrical autos (EVs). The dominant narrative has been that legacy automakers are doomed to go the way in which of the dodo birds, changed by Tesla and its numerous copycats.

You’ll be able to see a video of the meteoritic rise of Tesla’s market cap within the tweet right here. In 2021, it was as giant as that of the subsequent 10 greatest automakers TOGETHER.

I believe that is about to alter, for the straightforward purpose that the main automakers are catching up and difficult Tesla’s domination of the EV (Electrical autos) market. Volkswagen is on the forefront of this shift and is ideally positioned to carry inexpensive EVs to the market.

The group has the economic capability, monetary sources, expertise, and branding energy to handle efficiently the transition to electrical mobility.

The change to electrical may even present VW with the proper event to modernize its company and monetary construction. Rather a lot has been accomplished on this route already, as you will notice on this report. VW has additionally invested closely in turning the economic big right into a tech firm, from software program to self-driving automobiles.

Lastly, the VW group may additionally profit from the deliberate Porsche IPO and has different prestigious manufacturers that they might spin off sooner or later.

None of those developments appear priced in at this level. Tesla skeptics have been overwhelmed down by years of failed shorts technique, so nobody appears to note that the world’s second-largest automobile producer goes all-in on electrical automobiles.

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2. Prolonged Abstract: Why Volkswagen?

The Electrification Problem

The transition to electrical autos is the most important problem the automobile trade has confronted in many years. Tesla has been persistently main the pack, making a shifting goalpost for legacy producers. VW is uniquely positioned to catch up and exhibits early indicators of doing so. Rivals are centered on different applied sciences or ultra-low value ranges.

Re-Studying Innovation

VW has constructed a brand new ground-up growth course of for constructing EVs, which it’s sharing throughout the Firm’s totally different manufacturers. This dramatically will increase the synergy between the group manufacturers, decreasing waste on redundant R&D. VW can also be embracing the way forward for automobiles as related units, with huge progress on software program, devoted electronics {hardware}, and investments in self-driving expertise.

Porsche IPO, Dangers & Valuation

VW plans to promote 25% of its Porsche possession this fall. Half of the proceeds can be used to finance electrification, half distributed as a particular dividend. The VW group’s manufacturers are more likely to command a premium when buying and selling individually.

VW dangers are largely associated to precise and potential provide chain issues. A recession would clearly damage as properly, however valuation and earnings appear in keeping with the 10-year common and don’t replicate the highs of a cycle.

3. The Electrification Problem

One Battery To Rule Them All

If you’re following monetary markets, I doubt you’ve got missed the hordes of devoted Tesla traders. Tesla’s worth has not too long ago reached a degree the place it was price greater than your complete conventional automobile trade.

The image may be very totally different after we have a look at the variety of automobiles bought. With the trade churning out a complete of round 70 million items/yr in 2021, the 1 million manufacturing capability not too long ago reached by Tesla appears so much much less spectacular.

After all, Tesla’s market cap is based on the belief that conventional automakers won’t ever meet up with the EV market chief. So let’s have a look at the most recent EV gross sales numbers. The picture under from September 2021 would point out that Tesla certainly nonetheless fully dominates the trade.

I highlighted VW electrical automobiles. You’ll be able to see that in addition to an ultra-low-cost “soapbox” automobile from China, VW was the second-best behind Tesla, however nonetheless far behind.

However that is outdated information. The ID.4 is rapidly rising as a severe competitor, with gross sales up 65% in Q1 2022. At 30,300 items bought, the ID.4 is now above each different mannequin however Tesla fashions 3 and Y. You’ll be able to see a assessment of the ID.4 on this article.

The ID.4 begins at $40,760 within the US, considerably cheaper than Tesla’s most cost-effective entry, the Mannequin 3, which begins at $48,440.

Extra importantly, the ID.4 was lower than a 3rd of the VW group sale of EVs. The VW group bought near 100,000 EVs in Q1 2022, unfold out between Audi e-Tron, Porsche Taycan, and so on. Every of these is of equal high quality to Tesla’s luxurious fashions. It most likely may have accomplished even higher, however “VW provide of EV for the US market ran out“.

Altogether, The VW group EV gross sales in Q1 2022 are roughly 1/3 of Tesla’s gross sales. If market caps adopted EV gross sales quantity, VW needs to be valued at $276B, in comparison with the present $118B.

VW additionally delivered 1,800,000 conventional automobiles in Q1 2022, or x18 of its EV quantity. I might not base a VW valuation on Tesla, clearly an overvalued firm, however nonetheless, it put issues in perspective.

Is Tesla the Apple of Automakers?

If you’ll want to keep in mind just one factor from this report, keep in mind this part. When finding out Tesla, one of the best parallel can be Apple. Fanatical supporters, excessive costs, top-level tech, and glossy or shocking design. And that’s alright. I believe that is the proper area of interest for Tesla, and judging by Apple’s historical past, it may very well be a really worthwhile one.

If the smartphone market is an effective indication of the way forward for EVs, this implies a counterpart to the Apple technique. You may as properly determine and purchase the longer term Samsung, which barely outsells Apple in whole unit quantity.

The Apple/Tesla technique is a robust one. Additionally it is a limiting one. By tying a lot of the product and model to luxurious and identification, it locks itself out of components of the market. A low-cost iPhone wouldn’t be a “actual” iPhone. It appears the street to a $25k Tesla is equally gradual. The “cooler” cybertruck goes to reach earlier than the “boring” semi-truck (a undertaking lingering in Tesla limbo since 2019) or “simply low-cost” fashions.

Volkswagen (whose identify means “the folks’s automobile”) doesn’t have such an issue. It might probably commercialize cheaper and mid-range fashions underneath the VW, Seat, and Skoda manufacturers. It sells sports activities automobiles underneath Porsche and luxurious fashions underneath Audi, Lamborghini, Bentley, and Cupra. If it needs to, it even can enter the marketplace for electrical bikes with Ducati. It additionally supplies electrical variations of its Scania vehicles, MAN buses, and VW business vans.

For an ideal illustration of how VW is creating informal autos that fill niches unfit for the Tesla model, we are able to have a look at the reimagined iconic VW van ID Buzz.

So if Tesla is the Apple of EVs, Volkswagen has the potential to grow to be the Samsung of EVs.

It’ll possible be the grasp of the mid-price vary part for EVs, whereas additionally taking a sizeable chunk of all the opposite sectors, from low-cost to luxurious and sport. This needs to be helped by the arrival of a number of new merchandise, notably the ID.5, ID Buzz, and Lengthy-range Aero, but additionally the cheaper ID life.

The Different Rivals

The automotive trade is a reasonably fragmented one, and I anticipate it to remain this manner. For instance, I anticipate at the very least one of many Massive 3 (GM, Ford, Chrysler) to remain vital within the US market and be joined by Tesla on high of that market.

Judging by this listing of the most cost effective EVs, with Mazda, Kia, Nissan, and Hyundai, the low vary phase is more likely to be managed by Japanese corporations. This leaves VW nearly alone within the worthwhile mid-range phase.

I additionally anticipate the Chinese language and Southeast Asian producers to take over the area of interest of the ultra-cheap market, under $15k-$20k EVs. In that phase, we may even discover Renault-Dacia with the Duster Spring. Their small batteries will confine them to city and suburban utilization.

The one competitor that would or ought to have been a severe menace to VW was Toyota. It had the crucial mass, popularity, and sources to duplicate VW and even beat it. As an alternative of competing head entrance on battery EVs, although, Toyota appears to imagine in a give attention to hybrids and even hydrogen. Relying on the pace of the electrical transition, this may show a uniquely insightful technique or a horrible blunder.

That is nonetheless the most important menace to VW sooner or later, most likely rather more than Tesla. I encourage any investor in VW to pay shut consideration from 2025 onward to Toyota’s progress on solid-state batteries.

You’ll discover I didn’t point out different pure EV startups. It is because after Nikola’s outright fraud, the closest contender, Ford-backed Rivian, is in freefall after failing to ramp up manufacturing. Merely put, making automobiles is a troublesome enterprise, and there’s a purpose why there have been only a few new entrants within the markets within the final many years.

4. Re-Studying Innovation

Re-Mastering the Artwork of Automaking

By its personal admission, VW was too gradual to react to the pattern of electrification. It’s now working additional time to appropriate that mistake. Partially, its consideration was distracted by combating a rearguard battle in opposition to air pollution management on diesel automobiles. This led VW to falsify air pollution experiences in a scandal now often known as the Dieselgate.

The scandal resulted in expensive fines and several other executives have been arrested or fired. It additionally pushed VW to embrace the EV revolution. The corporate was punished with $2.7B in damages however was additionally compelled to take a position $2B in clear emission infrastructures. You’ll be able to learn extra concerning the flip to electrical autos from the corporate’s CEO on this interview.

VW is an professional at making nice ICE (Inside Combustion Engine) autos. So it wanted a number of years to discover ways to switch this experience into electrical engines. The talents have been already there for excellent steering, gearboxes, brakes, suspensions, and all the opposite elements that go into a contemporary automobile.

Till now, VW has primarily been a conglomerate of manufacturers. Every of the manufacturers had its personal designs, with restricted overlap. This led to a really complicated provide chain with, for instance, lots of of various gearboxes. The change to electrical has grow to be a possibility to revamp ALL the VW group’s new automobiles round frequent core {hardware} and software program by way of the shared Scalable System Platform.

That is now dealt with by the newly fashioned Volkswagen element Group division. Administration appears assured that they will strike the superb steadiness between protecting manufacturers uniqueness and customary designs:

“There are numerous similarities which we are able to leverage in scale — much more so on the software program aspect. If you happen to drove an Audi or Porsche and Volkswagen immediately, you’d most likely have totally different {hardware} and software program for navigation, for local weather management, and even for the window lifter. That’s not obligatory. … Software program provides an enormous alternative for economies of scale, nonetheless permitting for model differentiation.

Now, a Porsche can stay a Porsche, even higher than immediately. An Audi can stay an Audi, and Volkswagen will supply a broad vary of merchandise, however the fundamental software program stack will be very, very related. Software program is comparatively costly in automotive. Now it’s a one-time expenditure. … We expect that we’ve got a great likelihood to additionally grow to be very aggressive in software program if we construct a standard fundamental software program for all of the manufacturers. “

Embracing the Digital Revolution

Dieselgate was the shock VW wanted to show towards the longer term. Its innovation is concentrated on 3 areas: Batteries, Software program, and Autonomous Driving

Batteries

VW is growing a hybrid resolution between full reliance on giant third events (CATL, Panasonic) and Tesla-style vertical integration. Its 2 foremost companions are smaller battery producer NorthVolt and QuantumScape, a solid-state battery startup. It was contemplating an IPO for its battery division in 2021 however that appears to be on the again burner for now, with the Firm focusing as a substitute on the Porsche IPO (extra on that later).

VW can also be investing closely in startups with precious expertise. For instance, a $400M funding in Group14, changing the normal graphite anode in lithium-ion batteries with a silicon-carbon materials, is boosting battery capability by 50%.

VW’s low-carbon profile can also be helped by funding in new services, notably $10B in solar-powered factories in Spain for electrical automobiles and batteries.

The tip objective for VW is to maintain the excessive acceleration efficiency of EVs whereas additionally having very lengthy vary and quick charging. All of those will most likely be absolutely achievable solely when solid-state batteries are absolutely carried out.

Software program and IT {hardware}

The CARIAD division is in control of growing a group-wide software program stack, for use by all VW manufacturers by 2025-2030. This can make all VW automobiles related units, following the footsteps of the On-the-Air updates by Tesla. It additionally handles the design of devoted {hardware} permitting the removing of as much as 1 kilometer of cable per automobile in comparison with earlier designs.

Autonomous Driving

VW is partnering with and investing in Argo AI to develop autonomous driving options. Autonomous driving is a contentious subject amongst tech fanatics. Some anticipate it yesterday, others see it at finest 15 years sooner or later. Contemplating the fixed delays of Tesla Full Self Driving, it appears a troublesome nut to crack. You’ll be able to learn extra about Argo AI strategies in this interview with its CEO.

The trip pooling resolution MOIA and its devoted 6-seater are deliberate to enrich the autonomous driving options.

VW’s method is a cautious one, specializing in restricted autonomy in an outlined space, and increasing slowly from there. The cultural distinction between US startup tradition (the hare Tesla) and German industrialist (the tortoise VW) might be at play right here.

Our intention is to have the ability to drive a automobile as Volkswagen. We’ve got two areas: one is pushing robotaxi expertise with Argo. This includes shuttle providers, restricted areas, comparatively gradual speeds — they’re usually ODD, which is discovered and programmed. Then it goes space by space and metropolis by metropolis. The opposite manner we’re pushing is non-public mobility: we’ve got the Audi workforce and CARIAD workforce engaged on that as a result of we expect that autonomous driving won’t solely cowl this space of robotaxis, but additionally non-public automobiles. Step-by-step: first we sort out driving at degree three or degree 4 on open highways — German autobahns — after which we get into extra complicated areas.

The Verge

5. Porsche IPO, Dangers & Valuation

Porsche AG IPO

A aspect discover: I’m talking of Porsche AG, the corporate manufacturing and promoting the Porsche automobiles. Don’t confuse this with one other firm, Porsche SE. Porsche SE is the holding of the Porsche household, which owns a big a part of VW, which in flip owns Porsche AG, the automobile firm. Fairly complicated I do know. Welcome to German company buildings.

VW acquired Porsche AG in 2012 and is planning the sale of 25% of the Firm this fall. Porsche AG has not too long ago proven an ideal gross revenue margin of 18.6%. The supposed pricing of the IPO isn’t but clear. For instance, Mercedes, BMW, and VW commerce at 5-6x earnings; Ferrari at 40x earnings. So the a number of on Porsche earnings can be a significant component. The concept behind the IPO is to let Porsche AG commerce at luxurious/supercar multiples, as a substitute of “boring” giant automaker multiples.

At a center floor P/E between Ferrari and German automaker, this could give Porsche AG a valuation of $84B. Even at half of that, a $42B can be a major a part of VW’s $102B present valuation. Loads of debate exists about VW’s potential to carry its present “conglomerate low cost”. The second a part of this text supplies extra info on this concern and can enable you to kind your individual opinion.

Half of the proceedings of the IPO can be distributed to VW shareholders, and the remainder utilized to advancing VW’s electrification plans.

Different Manufacturers?

No plans have been introduced for the same IPO for the opposite luxurious model within the VW portfolio. However, if the Porsche IPO is successful, I may simply see Lamborghini, Audi, Bentley and even Ducati obtain the identical “25% bought in an IPO” remedy. This could assist value discovery for these manufacturers/corporations, whereas nonetheless sustaining VW’s whole management over the manufacturers.

This isn’t as far-fetched as you would suppose. Final yr, VW obtained a $7.5B supply for Lamborghini for instance. VW refused the supply.

Dangers

VW’s plans for electrification are the principle attraction to the inventory. Whichever of the highest 5 legacy automakers will handle the electrical transition will reap excellent rewards. However, the trade is going through fairly a number of headwinds:

Recession Threat

After one of many longest bull markets in historical past, rising charges, inflation, and battle in Europe have all contributed to an elevated danger of a world recession. The automotive trade is notoriously cyclical. All of the latest excessive income of VW and its opponents needs to be taken with a pinch of salt. We is perhaps on the highs of the financial cycle, and gross sales within the subsequent few years may end up decrease than hoped.

Power Prices

VW is a German firm, and exploding power prices in Europe are an actual concern. The corporate is producing outdoors of Europe as properly, however this could nonetheless damage its house market disproportionately. If Russian fuel stops flowing fully due to the Ukraine battle or sanctions, this could possible trigger exploding costs for energy-intensive supplies like metal and batteries.

Provide Chain Disruption

This one is much less a possible danger as an ongoing concern. It additionally applies to most VW opponents. Chip shortages have plagued automakers for two years now. The latest wave of Chinese language lockdowns isn’t going to assist enhance the provision chain both.

On high of that, an affordable however important element, a wiring harness, was largely provided from Ukraine.

Provide chain points restrict manufacturing, and output ranges are more likely to be disappointing in 2022. I anticipate VW to deal with it higher than its smaller opponents, however this may nonetheless damage gross sales quantity.

Lastly, some provide points may emerge in the long term. The provision of lithium, copper, cobalt, and nickel is perhaps too quick to cowl all of the batteries automakers are planning to construct. New mines may take 10 years to get operational, so it is a severe danger. In that respect, VW may make a great pair in a portfolio with the miner Rio Tinto (coated in a earlier report a number of months in the past). The rising prices of VW can be Rio Tinto’s income, decreasing the general danger of the portfolio.

Valuation

An funding in VW is a wager that the corporate emerges on high of the electrification pattern, or at the very least as a significant participant. Attributable to Toyota’s give attention to hybrid and various fuels like hydrogen, I believe that is possible. The persistent delays in an inexpensive Tesla automobile, construct high quality points, and branding points, make Tesla at most an equal, however not the domineering pressure folks suppose it’s. I believe the latest ID.5 gross sales quantity displays this variation in shopper notion in the case of EVs.

With a P/E of 5.3 and a value to free money circulation of 4.3, it could be robust to argue that VW is overvalued. My foremost concern can be for this coming from abnormally excessive earnings or revenues in the previous few years.

Trying on the previous 10 years of income, web earnings, and revenue margin, I don’t see something out of line. Solely drops in 2016 (DieselGate) and 2020 (Covid) break the pattern. VW is a really regular and steady firm. I’m additionally happy to see that web earnings is steady even with the huge funding in electrification.

This isn’t an organization that can see a 10x rise in worth. Nevertheless it offers a small dividend and is perhaps rather more steady than different overvalued parts of the market. An organization with a significant give attention to software program, electrification, and self-driving can also be providing the low valuation of an growing older industrial big.

As we transfer to bear market territory, will market notion change from in search of dangerous hypergrowth to stability. You may argue that it’s already taking place. If it does, VW inventory can be there to capitalize on it. The Porsche AG IPO is one other attainable catalyst, with the particular dividends seemingly not priced in.

For my part, when you’re contemplating including an organization like VW to a portfolio, the principle focus needs to be on offering much less volatility to the portfolio whereas retaining the potential for first rate returns. Dividends and steady web earnings ought to present that, given the low multiples. Wanting a brutal worldwide recession, VW ought to present first rate returns, with an opportunity of a inventory value surge pushed by optimistic EV gross sales and manufacturing figures or a profitable Porsche IPO.

The chance with these outdated industrial giants is the chance that they are going to be caught unaware of a expertise shift. You don’t need to find yourself proudly owning the subsequent Kodak all the way in which to zero. Contemplating the efforts VW has put into modernizing its line and innovation, I’m assured they may profit from the EV pattern as a substitute of being harmed by it.

6. Conclusion

Volkswagen is the kind of funding that can most likely by no means present the best returns in a portfolio. It’s a safer, extra mature kind of firm, decreasing total volatility. I might not essentially have appeared deeper if it was not promoting at a reasonably low-cost value.

On high of the worth, I’m appreciative of the technique. The corporate didn’t rush into electrification, however when it determined to do the change, it did it proper. The product performances in mileage, high quality, and value present a degree of engineering equal or superior to Telsa, the market chief. The one possibly lagging half, software program, is catching up at a panoramic pace.

Growing the ID.4 and ID.5 was an enormous endeavor in design, battery expertise, electrical engine, and particular components like gearboxes. This EV experience acquired in mid-price automobiles can now be introduced rapidly to all value ranges, in addition to business autos, vehicles, buses, and even bikes.

I anticipate VW scaling up electrical autos will catch most observers abruptly. The EV market obtained used to seeing the opening of a brand new Tesla Manufacturing facility on a brand new continent as massive information. With corporations of the size of VW coming into the market aggressively, this can be a standard incidence.

VW may even be capable of draw from its nearly 2 million conventional automobiles per yr gross sales to finance the transition. Its “legacy” operations additionally give it entry to a really deep pool of proficient engineers, designers, researchers, designers, testers, and so on, whose expertise can comparatively simply be repurposed for EV fashions. The identical outdated true for model energy, PR contacts, and gross sales networks.

The power to nonetheless generate profits for ICE (Inside Combustion Engine) automobiles whereas turning to EVs appears particularly helpful for me. If the transition to EVs seems slower than anticipated, or uncooked minerals for batteries are too uncommon or costly, VW can merely gradual issues down a little bit and maintain getting cash promoting the automobiles that made the enterprise robust for many years.

Lastly, the wealthy panel of manufacturers within the VW group may very well be a supply of hidden worth. Luxurious or sports activities model tends to commerce at a premium. After Porsche, VW may progressively think about IPOs for Lamborghini, Bentley, Audi, and Ducati. I believe that the components are price greater than the market worth for the entire group collectively.

Utilizing the Porsche IPO as a template, VW protecting 75% possession would enable simply sufficient value discovery, whereas protecting the model safely at house. They may all profit from the Group R&D and customary base structure for the transition to EV. That is one thing unbiased supercar corporations like Ferrari couldn’t afford with out changing into over-reliant on third-party suppliers.

Lastly, self-driving options comprise numerous choices. I believe that even when Argo AI seems to not be one of the best technical resolution, its strategies will appease regulators higher than Teslas. Nobody needs 2-tons of metallic driving round by itself with out sufficient information and suggestions to make sure it’s protected.

So I anticipate the adoption of self-driving automobiles can be gradual for regulatory causes irrespective of how good the tech is. It’ll solely be adopted on highways and well-known routes at first (like between airports for instance) and develop from there. A popularity for gradual and regular company strategies appears extra applicable than the considerably reckless and brash model of an Elon Musk.