The Mystery of Volkswagen Stock’s Ridiculously Low Valuation

Volkswagen looks strangely cheap. The company sold 9.2 million cars in 2023, and its market capitalization is about $63 billion, while Toyota Motor sold roughly 10 million cars, but sports a market capitalization of about $260 billion, according to FactSet.

That’s just the start of the valuation conundrum. Volkswagen has roughly $50 billion more cash on its books than debt, including adjustments typical for large auto makers for things such as leasing operations. Volkswagen also owns about 75% of Porsche’s stock. That stake is worth some $55 billion. So, net of cash and
Porsche
shares, Volkswagen stock is worth roughly negative $40 billion.

That makes no sense. “Why is our stock trading like that?” asks Volkswagen Chief Financial Officer Arno Antlitz. Perhaps depressed valuations for peers in its region are a fact. “First and foremost that’s true for some companies in Europe.”

He has a point.
Stellantis
has a market capitalization of about $63 billion. Net of cash and leasing, that number is closer to $30 billion, leaving Stellantis shares trading for 2 times estimated 2024 earnings.
BMW
shares trade for about 3 times earnings. Ford Motor and Toyota shares both trade for about 4 times earnings, after adjustments, while GM stock trades for roughly 3 times. Yet Volkswagen shares trade for negative 3 times earnings.

There is also the problem of Volkswagen’s complexity. It has a lot of brands, including Porsche, Audi, Skoda, Lamborghini, and Bentley. VW also has an EV-battery company called PowerCo.

Antlitz is working to reduce complexity. “We are open to bringing in external investors for PowerCo,” he says, adding there should be a PowerCo initial public offering eventually, similar to what VW did with Porsche in 2022.

Even though the Porsche IPO hasn’t fixed Volkswagen’s valuation, it generated some value for shareholders. VW paid out some €19 ($20.66) a share in special dividends.

Volkswagen prefers paying variable dividends, declared annually, as its main form of capital return to shareholders, and aims to pay out roughly 30% of total profits. Over the past decade-plus, Volkswagen has paid out some €35 billion ($38 billion), representing about 31% of its total profits.

Eventually, investors have to stop thinking about VW’s valuation and think about other things. It’s too hard to figure. “What other questions do we get…Are you able to ramp up your electrification strategy as planned,” explains Antlitz.

His answer is yes, pointing to recent data. Across all its brands, battery electric vehicle, or BEV, sales surpassed 770,000 units in 2023, up about 35% year over year. BEVs accounted for more than 8% of total car sales, up from about 7% in 2022.

VW BEV sales in the U.S. grew about 60%, coming in at about 70,000 units. Five models sold more than 5,000 units in 2023, up from three models in 2022.

More BEV growth is coming as models proliferate. “Only a very small number of segments are electrified so far,” says Antlitz. “There are so many models coming…[the] ID Bus, ID. 7, Q6 E-Tron.” Eventually, there will be VW EVs under $35,000, too.

EV success might also be part of the current valuation conundrum. Perhaps investors are worried BEVs won’t be as profitable as traditional cars. Volkswagen doesn’t see a profit issue, and is planning for “margin parity” on some EV models by 2025. That essentially means earning 7% to 8% operating profit margins. Lower battery costs as well as more manufacturing scale are key to help meeting that goal.

Perhaps BEV profits can help solve Volkswagen’s valuation conundrum. Nothing else has worked so far.

Through midday Wednesday, Volkswagen shares were down about year to date. The
S&P 500
was about flat over the same span. Germany’s
DAX Index
was off about 2%.

Write to Al Root at [email protected]