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We expect Volkswagen's [VOW3] announced investment and joint venture with startup EV maker Rivian [RIVN] to pay off in the form of incrementally lower software investment requirements. As a result, we have increased our Fair Value estimate to EUR 351 from EUR 346 per Europe-traded preferred share of Volkswagen.
The estimate, the highest among sell-side analysts tracked by Morningstar Pitchbook, implies 235% upside from Volkswagen's Wednesday closing price of EUR 104.80.
Management’s 2024 guidance includes consolidated revenue of up to EUR 338 billion, and group adjusted EBIT of 7%-7.5%. We estimate total vehicle volume at 9.2 million and consolidated revenue of EUR 312 billion amid increased competition for more-affordable cars. We assume 7.1% margin as high uncertainty from industry headwinds remain in 2024.
During the past 15 years, Volkswagen's group adjusted EBIT margin has had a high, low, and median of 8.1% (2022), 1.8% (2009), and 6.3%. Our assumptions include an average 6.8% adjusted EBIT margin during our Stage I forecast. We assume margin contraction in the final two years of the forecast to our 5.5% normalized midcycle margin, 80 basis points below Volkswagen's 15-year historical median. While automakers may enjoy temporary margin expansion as battery electric vehicles reach more optimal levels, due to the industry's highly competitive nature, we think sector margins will remain within historical levels in the long term.
We use a 10.3% weighted average cost of capital to discount Volkswagen’s cash flow. An above average systematic risk rating, which carries an 11% cost of equity, results from sensitivity to economic cycles and unfavorable operating leverage but with relatively lower financial leverage. Our pretax cost of debt assumption is 6.5%, considering the spread creditors are likely to demand given the credit quality. We assume a long-run effective tax rate of 22.5% based on the German statutory rate and Volkswagen’s historical results. We weight equity at 89% and debt at 11%, resulting in our 10.3% tax-affected weighted average cost of capital.
Volkswagen Leverages Its Scale With Rivian Investment to Accelerate Electric Vehicle Platform Build
We see Volkswagen as successfully executing a global automotive strategy with one of the most aggressive plans in the industry to switch to battery electric vehicles from internal combustion powertrains. A broad array of brands, serving multiple segments, reduces reliance on any one vehicle category. As one of the world's leading volume producers, Volkswagen's economies of scale from common platforms across a number of models enable cost savings unattainable by smaller competitors.
The company owns premium brands Audi and Porsche, ultraluxury brand Bentley, and the Italian exotic sports car maker Lamborghini. Whatever potential moats these storied brands offer are offset by the mass-market Volkswagen, Skoda, and Seat brands, plus the more cyclical commercial vehicle business. Prepandemic and pre-chip crisis, vehicle deliveries were nearly 11.0 million. In 2023, VW delivered 9.4 million vehicles globally.
Volkswagen's MEB platform underpins its current BEV offensive. By the end of 2022, the company had 27 BEV models derived from MEB and had launched its unified battery cell strategy that targets 80% volume penetration by 2030 and anticipates a 50% entry-level segment battery cell cost reduction as well as 30% savings in the volume segment. In 2025, Volkswagen expects BEV to account for 20% of global sales. Also in 2025, the company is to introduce its Scalable Systems Platform for the next BEV generation and on which all brands' models will be based. The new platform will be fully digital, utilizing the firm's VW.OS operating system developed in-house by Volkswagen's Cariad software group, augmented by existing technology and future development within the newly announced joint venture with Rivian to enhance VW's "software-defined vehicle" capabilities.
We like that Volkswagen has successfully pursued a common architecture manufacturing strategy. We think the strategy, which increases economies of scale, will continue to reduce cost. However, the MEB common architecture strategy presents a risk if consumer demand for BEVs does not materialize. Volkswagen targets adjusted EBIT margin of 7%-8% in 2025, up from its 6.0% 15-year historical median.
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