VALUATION HIGHLIGHTS

1. Volkswagen China & Affiliates constitute 29% of the Trefis price estimate for Volkswagen AG's stock.
2. Volkswagen Financial Services constitute 28% of the Trefis price estimate for Volkswagen AG's stock.
3. Porsche, Bentley constitutes 10% of the Trefis price estimate for Volkswagen AG's stock.

WHAT HAS CHANGED?

1. Volkswagen latest results

Volkswagen reported its results for 2023, indicating that revenue rose 15.4% to Euro 322.3 billion ($352 billion), while earnings per share increased 8% to Euro 31.98 ($35 billion). The company expects 2024 to be a tough year on account of a weak economic outlook and growing competition.

2. Porsche IPO

Volkswagen took its iconic sportscar subsidiary Porsche public in late September in what was one of the largest public offerings in Europe. VW floated a 12.5% stake which helped it raise a little over 9 billion (about $8.8 billion). Porsche was valued at over $55 billion as of early May 2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Volkswagen's value that present opportunities for upside or downside to the current Trefis price estimate for Volkswagen AG:

Volkswagen China & Affiliates Vehicles Sold:

Sales volume has declined from 3.7 million in 2019 to 3 million in 2022. We expect the metric to rise modestly to about 3.3 million by 2029. However, if sales rise to about 5 million units, driven by a strong uptake for EVs, we could see a 25% upside to our price estimates. On the other hand, if tighter regulations and unfavorable monetary policies result in sales touching 2 million units, there could be a 15% downside to our price estimate.

BUSINESS SUMMARY

Volkswagen AG, headquartered in Wolfsburg, Germany, is one of the largest global automotive companies in terms of the number of vehicles sold annually. In addition to producing Volkswagen-branded passenger cars and light commercial vehicles, Volkswagen AG, along with its 340 subsidiary companies, also sells passenger cars under various automotive brands including Audi, Bentley, Skoda, Porsche, SEAT, and Lamborghini.

Commercial vehicles and engines and turbomachinery are sold under the Scania and MAN marquees. The company provides financial services, including leasing and fleet management. Following the purchase of Ducati, the Volkswagen Group has expanded its range to include motorcycles. China is Volkswagen's largest sales market and is a significant contributor to the company's profits. Volkswagen AG has also maintained the largest market share in Europe for over two decades.

SOURCES OF VALUE

China to be a significant driver of growth for Volkswagen Group

China is Volkswagen's single largest market, with around 3 million vehicles delivered in 2022, driven in part by various joint ventures and partnerships. The company has also been doubling down on its EV push in China. VW intends to invest about $1.1 billion in an electric car development and business center in Hefei while also planning to launch the new high-end ID.7 sedan in the country next year.

Luxury brands critical to Volkswagen's value

Luxury brands are essential for Volkswagen, whose operating margin is much less than the 10-11% margin at which Toyota typically operates. Through the last year, while Audi, Porsche, and Bentley combined formed 14% of the vehicle deliveries for Volkswagen, the divisions formed 42% of the Automotive revenue and a much larger 64% of Automotive EBITDA. This is because the average unit pricing of a luxury car is well over $50,000, compared to just under $30,000 for the average price of vehicles overall. Given the high fixed cost of manufacturing and distributing a car, a higher purchase price is the biggest guarantor of profitability.

Vehicle financing business is driven by high margins

The operating margin of Volkswagen's Financial Services is considerably higher than the automotive division. The division has also posted more consistent growth than the automotive business.