Why Volkswagen buyers get a Lamborghini for free

by CHRIS BRYANT (Bloomberg Opinion)

MORE than 70% of the roughly one million Porsche 911 sports cars built since the 1960s are still on the road. While one wonders what happened to the others, it shows 911s are prized by collectors and so tend to hold their value. Alas, one can’t say the same about parent company Volkswagen AG’s (VW) shares.

Porsche has been touting its strengths ahead of an IPO planned for later this year. Owing to its bumper cashflows and big strides in electrification — the battery-powered Taycan already outsells the 911 and Porsche is targeting more than 80% of its car sales to be electric vehicles (EVs) by 2030 — a valuation of around €80 billion (RM363.25 billion) looks attainable, according to analysts and my own back-of-the-envelope calculations.

But here’s another eye-catching statistic: The market capitalisation of VW, which owns 100% of Porsche, has shrunk this year to less than €80 billion, which means the remainder of a group that includes Audi, Lamborghini and Bentley essentially comes for free.

VW aims to leapfrog Tesla Inc in EV sales within three years, but even with Elon Musk distracted by his Twitter Inc bid, Tesla is worth more than nine times its German rival. Although VW can’t do much about investors’ recession worries, it must do more to ensure its mastery of software is as great as its mechanical engineering.

To be sure, VW has often sold for less than the sum of its parts, in part due to its wretched corporate governance. Yet, selling a 25% stake in Porsche was supposed to help VW unlock value.

There’s no sign of that happening yet. Even though the tech bust has taken the air out of near revenue-less auto start-ups, this hasn’t translated into greater investor appreciation for more established and profitable automakers.

Among its European peers, VW’s shares have declined the most over the past 12 months and the stock is priced at an abysmal four times forecast earnings.

Some of this weakness likely reflects scepticism that the Porsche transaction will proceed as planned: VW and Porsche remain committed to the fourth-quarter (4Q) timetable, but it’s hardly an ideal moment to pull off one of the largest-ever European IPOs. Last year’s IPO feast has become a famine.

The overly complicated deal structure seems primarily designed to let the Porsche families gain more control over a prized asset, rather than optimise Porsche’s potential valuation, and rising interest rates threaten to inflate their borrowing costs to acquire shares.

But I don’t think Porsche is the problem here. VW car sales tumbled more than 25% in the first five months of 2022, a much bigger decline than some rivals suffered. Meeting full-year guidance for a 5%-10% annual sales increase will therefore be challenging, notwithstanding rapidly improving semiconductor availability and VW’s large backlog of orders.

The group’s premium brands demonstrated their pricing power in the 1Q and dealer inventories remain low, which bodes well for this year’s cashflows. However, VW’s core mass-market brand would be vulnerable if there’s a recession due to the difficulty of fully passing on raw material and labour cost increases to customers.

These aren’t the only headaches VW faces. Its market share in China is shrinking, and it’s not clear Covid lockdowns and parts shortages are entirely to blame. VW’s EVs have yet to excite Chinese customers and it faces increasingly tough local competition. Shifting German political attitudes toward China aren’t helping.

VW is also struggling with software. CEO Herbert Diess believes VW must develop a proprietary group-wide software stack rather than rely on Google or Apple. But despite massive investment — its Cariad unit now has 5,000 employees — the transformation isn’t going smoothly.

Key models such as the electric Porsche Macan have been delayed by software issues, triggering tensions with the group’s premium brands. VW is therefore having to develop two entertainment and automated driving systems in parallel — a typical VW compromise that doesn’t come cheap.

Porsche hasn’t hid its frustration about the software delays, which don’t help its IPO valuation aspirations. They also explain why VW is still valued like a metal-basher rather than a tech leader.

Unlike a 911, VW shares aren’t for collectors: They’re for masochists. — Bloomberg