From Dieselgate To EV Innovator: Volkswagen's Quest To Beat Tesla And Win Over China

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Volkswagen has significantly increased its EV deliveries in 2023, reflecting its commitment to electrification and its ambitious investment strategy.The company has seen remarkable growth in EV sales ...

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GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4681698-from-dieselgate-to-ev-innovator-volkswagens-quest-to-beat-tesla-and-win-over-china><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Volkswagen has significantly increased its EV deliveries in 2023, reflecting its commitment to electrification and its ambitious investment strategy.The company has seen remarkable growth in EV sales ...</p>\n\n<a href=\"https://seekingalpha.com/article/4681698-from-dieselgate-to-ev-innovator-volkswagens-quest-to-beat-tesla-and-win-over-china\">Source 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2X Shares","IE00BMPRXR70.SGD":"Neuberger Berman 5G Connectivity A Acc SGD-H","BK4567":"ESG概念","TRATF":"Traton SE"},"translate_title":"从柴油门到电动汽车创新者：大众汽车战胜特斯拉和中国的追求","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VWAGY":1,"BMWYY":1,"MBGAF":1,"POAHY":1,"RIVN":1,"TOYOF":1,"TRATF":1,"TSLA":1,"TSLL":1,"MSFT":0.9},"content_text":"Volkswagen has significantly increased its EV deliveries in 2023, reflecting its commitment to electrification and its ambitious investment strategy.The company has seen remarkable growth in EV sales in Europe, North America, and China, solidifying its position in the global EV market.Volkswagen's strategic focus on digitalization, emerging market expansion, and collaborations with industry leaders position it for future growth and stock appreciation.Uladzimir Zuyeu/iStock Editorial via Getty Images In my previous coverage of Volkswagen (OTCPK:VWAGY), I underscored the automaker's robust entrance into the electric vehicle (EV) sector, highlighting its impressive financial fortitude and the strategic shift towards electrification as the main pillars for continued success into the future. Volkswagen's vigorous pursuit in the EV realm, reflected in a 42% increase in EV deliveries in Q1 2023 and overcoming supply chain hurdles, painted a picture of the company adeptly navigating the complexities of modern auto manufacturing. In this updated analysis, I am delving deeper into Volkswagen's strategic maneuvers, particularly in its partnerships and investment initiatives, which I deem favorable to further fortify its position in the automotive industry. The company's near $200 billion commitment towards EVs and digitalization over the next half-decade marks a significant stride in shaping future mobility. This pivot is complemented by key partnerships with industry leaders such as Microsoft and Ford, enhancing its capabilities in connected car services and electric platform development. Moreover, Volkswagen's collaborations with Umicore, 24M Technologies, and Vulcan Energy Resources in battery technology are particularly noteworthy, setting the stage for more sustainable and efficient EV production. Furthermore, the strategic alliance with Mahindra to electrify the Indian automotive market not only diversifies Volkswagen's geographical footprint but also amplifies its impact in a significant emerging market. Incorporating these new developments, my analysis remains bullish on Volkswagen. The combination of its steadfast commitment to innovation, strategic collaborations, and a solid foundation in the EV space solidifies its potential as a leading contender in the global electric automotive space. The future looks promising for Volkswagen, as it harnesses technological advancements and strategic partnerships to drive its growth in the rapidly evolving automotive landscape. Volkswagen Brand Portfolio (Volkswagen Investor Presentation) Overview Volkswagen, a storied name in the automotive industry, has undergone a transformative journey, especially in recent years. Historically recognized for its iconic models like the Beetle and the Golf, Volkswagen has evolved into a significant player in the global automotive market and is now contesting for a leading position in the race for the electrification of cars. The conglomerate encompasses a host of brands often unknown, including Volkswagen, Audi, Porsche (OTCPK:POAHY), and Skoda. It also boasts a 90% controlling interest in Traton (OTCPK:TRATF). Financially, the company showcases a Price-to-Earnings (P/E) ratio of 4.43 as of March 2024, indicative of robust earnings relative to its market valuation. This figure marks a slight increase from 3.92 at the end of 2022. Volkswagen's commitment to electric vehicles is a key aspect of its strategy, with nearly $200 billion allocated towards EVs and digitalization over the next five years. Further, in recent years, the company has seen significant growth in EV deliveries, notably in Europe, North America, and China. Looking ahead, Volkswagen aims to further solidify its position in the EV market, with ambitious targets like having one-fifth of its global sales being fully electric by 2025, underscoring its long-term vision for sustainable mobility and technological innovation. Emerging Market Expansion: A Strategic Catalyst for Volkswagen's Growth Volkswagen's strategic push into emerging markets, notably China, underlines a significant move towards capturing a larger share in the rapidly growing electric vehicle segment, which has seen to grow comparatively faster in said regions than compared to the rest of the world. The notable growth in all-electric model deliveries in China, rising by 23.2%, is not merely a reflection of the company's production strengths. It highlights Volkswagen's approach to understanding and catering to the unique preferences and needs of different regional markets, which they have historically excelled in. In the current global economic landscape, where emerging markets are pivotal for sustainable growth, Volkswagen's strategic direction can be seen as a defining move in its global expansion story, marrying keen market insight with ambitious growth strategies. 2023 BEV Deliveries (Volkswagen Group 2023 Annual Presentation) Strategic Digitalization and EV Investments: Driving Volkswagen's Market Leadership Volkswagen's allocation of nearly $200 billion towards EV and digitalization initiatives over the next five years marks a transformative era for the company. This strategic pivot, focusing on cutting-edge mobility and technological advancements away from its diesel-engine-powered cars, places Volkswagen at the forefront of the electric vehicle revolution. Key developments, such as the launch of the ID.7 Tourer and substantial investments in digital infrastructure, are poised to redefine customer experiences and expand market reach. As these investments come to fruition, I expect them to not only diversify Volkswagen's revenue streams but also enhance its brand value in the increasingly competitive EV market. This long-term approach significantly fortifies Volkswagen's market position, with what is very likely to include positive implications on its financial performance and hence its market valuation along the road. The success of these initiatives will be a crucial determinant of Volkswagen's ability to maintain its competitive edge and capture new market segments in an evolving automotive landscape, that has become increasingly competitive over the years. Strategic Collaborations: Fueling Volkswagen's Global EV Ambitions Volkswagen's strategic partnerships and collaborations, particularly in the realms of battery technology and autonomous driving, present a substantial catalyst for its stock valuation. The company's alliance with tech giant Microsoft to develop the 'Volkswagen Automotive Cloud' is a notable example. This partnership focuses on accelerating Volkswagen's digital transformation, leveraging Microsoft Azure for automotive cloud and connected car services, a pivotal move in the industry's digital shift. Moreover, Volkswagen's expansion of its collaboration with Ford on the MEB electric platform exemplifies its strategic focus on co-developing electric vehicle technologies. This partnership aims to produce another electric model for the European market, doubling the planned MEB volume to 1.2 million units, underscoring a shared commitment to electrification and autonomous driving. In addition, Volkswagen's recent partnerships aimed at bolstering its EV production capacity, such as alliances with Umicore, 24M Technologies, and Vulcan Energy Resources, further solidify its position in the battery technology field. These collaborations are integral to Volkswagen's plan to invest significantly in EVs, including the establishment of six battery gigafactories in Europe by 2030, aiming for a combined production capacity of 240 gigawatt-hours. Furthermore, Volkswagen's intention to explore a strategic alliance with Mahindra to accelerate the electrification of the Indian automotive market showcases its ambition to penetrate emerging markets. This cooperation, potentially covering more than one million units over its lifetime, will explore various aspects of e-mobility, including vehicle projects and charging solutions. These partnerships not only reinforce Volkswagen's commitment to spearheading EV technology but also position it strategically for increased market share and revenue growth in the evolving global automotive landscape. As these collaborations yield innovative products and technologies, they are likely to enhance Volkswagen's ability to better access new markets such as India but also allow it to faster catch up with EV frontrunners such as Tesla or BYD. Financial Overview 2023 (Volkswagen Group 2023 Annual Presentation) Valuation In reassessing Volkswagen's valuation, it's vital to consider an updated Discounted Cash Flow analysis. For the full year 2023, Volkswagen had Free Cash Flow of €10.698 billion, which based on the number of shares, which is around 501 million at the end of March 2024, results in a Free Cash Flow per share of €21.34. I have updated the cost of capital, set at 8.5% the previous time to 9% based on underlining interest rate increases, which aligns with benchmarks from a peer group that includes legacy automakers like BMW (OTCPK:BMWYY), Mercedes (OTCPK:MBGAF), Toyota (OTCPK:TOYOF), and emerging EV players such as Tesla (TSLA) and Rivian (RIVN). Based on long-term projections from management and historical figures from Volkswagen over the past 20 years it is reasonable to assume a 14% EBITDA ratio, which for simplification in this case I will keep constant also for both growth and perpetuity stage. I believe this assumption to be valid on the grounds that further investments in the short term will likely be evened out by margin gains in the long term. For the growth stage, meaning in this case the next 8 years I have assumed a conservative growth rate of 6.5%, which is in line with last 3 years' average revenue growth and projected growth by the management for this year and the next 5 years. Furthermore, a perpetuity growth rate of 1.75% is employed, reflecting a cautious estimate anchored in the weighted average of historical GDP growth, correlating with sales in relevant markets. Given the ongoing uncertainties in future sales forecasts, particularly in the dynamic EV market, a prudent approach is adopted. Under these premises, my model suggests a fair value estimation of $317.57 for Volkswagen's stock. This indicates a substantial potential upside, around 51.4%, from its trading position as of April 1st. Sum of the Parts Problem The sum of the parts problem is one Volkswagen has been battling with for basically its lifetime as a publicly listed company. As stated above, the Volkswagen group consists of several notable brands, for which Ryan Daniels laid out a compelling valuation case back in 2019 already. I would argue that little has changed today and that, hypothetically, valuing the Volkswagen brands one by one would result in a higher aggregate valuation, as have the IPOs of Porsche and Traton respectively shown. Management has realized the issue, which is why it has started segregating the brands and listing some on their own on the market. For more details on this aspect, I refer to a previously conducted analysis of mine, which focused on this topic in more detail. Risk Factors While Volkswagen presents an enticing investment opportunity, several risk factors should be considered. First, there is the potential for increased competition in the EV space, as other automakers strive to gain market share. Additionally, supply chain disruptions and semiconductor shortages could continue to impact production and hinder Volkswagen's ability to meet growing demand. Furthermore, regulatory changes and shifts in consumer preferences could pose challenges to Volkswagen's long-term growth and profitability. It is essential for investors to monitor these risks and evaluate Volkswagen's ability to navigate them effectively. Conclusion In conclusion, Volkswagen's strategic initiatives in electric vehicle production, coupled with its aggressive expansion into emerging markets and substantial investment in EV and digitalization, position the company for significant growth. The company's robust financials, marked by a fair stock value estimate of $317.57, reflect its potential in the competitive automotive sector. Collaborations with industry leaders and a forward-thinking approach to technology and market expansion further reinforce its potential for stock appreciation. As Volkswagen continues to innovate and adapt in the fast-paced EV market, it stands as a compelling investment opportunity, balancing its rich legacy with a clear vision for the future.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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