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Wall Street has sold investors on the idea that they should start with “micro” analysis – the idea that they should make investment decisions by comparing things like price/earnings ratios, income statements or other company details.
But I do the opposite; I start with the “macro” analysis.
I look for big-picture trends that drive huge, multiyear moves in entire sectors of the market.
I’m talking about trends that can spin off dozens of triple- and even quadruple-digit gains in just a few years.
Catching just one of these trends – at the right time – can help anyone accumulate enough capital to finance their dreams and to provide themselves with an enviable retirement…
And the electric vehicle (EV) megatrend that’s been growing for the past few years is one of my favorites.
While I usually go for the “picks and shovels”-types of plays in the EV space, I do have an automaker that I see coming out on top… even going so far as to dethrone the “king” of EVs, Tesla Inc. (TSLA).
Here’s why…
A New King
My top pick in the EV space is Volkswagen AG (VWAGY).
VW often stands atop the champion’s podium as the world’s largest auto manufacturer. The giant German company jockeys with Toyota Motor Corp. (TM) year by year for the top spot, whether measured by auto deliveries or revenues.
In 2020 and 2021, for example, Toyota sold more cars, but VW produced larger revenues. In 2019, VW sold more cars than Toyota and produced larger revenues.
Volkswagen Group owns the Volkswagen brand of automobiles, of course. But it also owns Audi, Porsche, Bentley, Bugatti, Lamborghini, Ducati, Scania, Seat, Skoda, and Man brands.
In all, VW’s 120 production plants produce and sell eight to 10 million cars per year in 153 countries… and they do so very profitably.
During the past 12 months, for example, VW posted gross earnings (EBITDA) of $72 billion and net income of $18.2 billion – and that’s with various supply-chain challenges, a war in Ukraine, and recessionary conditions worldwide.
You get the point. VW is one of the biggies.
But Tesla might be the sexiest EV company, which is probably the main reason its stock has been dazzling investors for so many years.
Even though Tesla shares have tumbled more than 52% from their all-time high, they remain a whopping 580% above their 2020 low and still cling to a hefty $617-billion market value.
Let’s put the number in perspective, relative to Volkswagen…
Crushing Metrics
While it’s true that Tesla’s EV sales crushed Volkswagen’s in 2022 by nearly 130% (with Tesla reporting 1.31 million EV sales in 2022 and Volkswagen reporting 572,100), Tesla trails far behind Volkswagen on all other relevant metrics. The differences between the two automakers are enormous.
- Tesla sold 1.3 million cars last year. Volkswagen sold six times more than that.
- Tesla spent $1 billion on research and development (R&D) during the last 12 months. Volkswagen spent six times that amount.
- Tesla generated $81.5 billion in revenues in 2022. Volkswagen generated 3.5 times more.
And yet, Volkswagen’s market value is not 3.5 times larger than Tesla. On the contrary, Tesla’s market value is seven times larger.
It is true that Tesla makes far more EVs than Volkswagen. But even on this metric, Volkswagen clearly shines brightly.
As every major car company on the planet designs new EV models and begins delivering them into the marketplace, Tesla’s market share will shrink, perhaps rapidly.
But there’s no need to fret about Tesla’s future, when the EV sector is offering so many other ways to play the EV trend.
I expect VW to continue outperforming Tesla in 2023 and beyond – by making a market-beating advance, as Tesla’s lavish valuation continues to shrivel.
Making Strides
To be clear, a low valuation alone is not reason enough to buy any stock. But Volkswagen’s considerable growth potential, coupled with the stock’s rock-bottom valuation, provides ample reason to pull the “buy” lever.
Thanks to its focused and substantial investment in producing a new generation of electric vehicles, VW has embarked on a robust, multi-decade growth trajectory.
The company makes no secret of its ambition to become the world’s preeminent EV company… and it is making rapid progress toward that goal.
A few months ago, the new ID.4 SUV, VW’s first-ever U.S.-made BEV, started rolling off the production line in Chattanooga, TN. In fact, on a recent trip to Chattanooga, I stepped off the plane to find this display in the “Arrivals” lounge.
The ID.4 is just the first fruit of Volkswagen’s ambitious expansion plans in the U.S. market. The company expects 55% of U.S. sales to be fully electric by 2030.
Over the next five years, Volkswagen plans to invest a titanic $76 billion in global EV production and battery technology, including $7 billion to expand U.S. production and $17 billion to expand its market-leading presence in China. No other automaker is spending close to that amount.
Volkswagen is also investing heavily to develop of an open fast-charging network worldwide. By 2025, the company and its partners expect to install 45,000 High Power Charging points in Europe, China, and the U.S.
So far, the Volkswagen Group produces just eight BEV models, including the Audi Q4 e-tron – and the high-end Porsche Taycan. But the company plans to launch at least one new electric model per year over the next several years. Next year’s lineup will include the stunning 600-horsepower Porsche Macan and the retro Buzz minivan.
(Source: Volkswagen Newsroom)
Already, VW’s EV achievements are paying dividends for the company.
Despite a substantial drop in VW’s overall car sales during the last 12 months, its EV sales rose at a healthy clip. Total EV deliveries for the first nine months of 2022 increased 25% year over year, led by a whopping 139% jump in China deliveries.
Thanks to these sizeable sales gains, BEVs now represent 6.8% of Volkswagen’s total car sales – up from less than one percent in 2019.
Full Throttle
Meanwhile, Volkswagen is also heartily investing in battery technology to gain an advantage over its rivals.
In July, the company created PowerCo, a 100%-owned subsidiary, to produce battery components in Europe-based factories. According to VW, the battery unit has the potential to produce up to €20 billion in revenue annually.
In September, Volkswagen announced a new joint venture between PowerCo. and the Belgian material company Umicore SA (UMICY).
Both companies will control the JV equally, as they invest €3 billion in new battery materials production capacities. If all goes as planned, initial Europe-based production of cathode material and their precursors will begin in 2025. Then, by 2030 the partners hope to produce enough battery components to equip 2.2 million BEVs each year.
Looking farther down the road, Volkswagen believes software-based services will generate one-third of revenues in the global mobility market by 2030. For this reason, it is developing proprietary software expertise.
As the company explains…
Over the coming years, the Group’s own software and technology company CARIAD will develop the new E3 2.0 software platform for all Group vehicles and thus exploit synergy effects across all the brands… The new software architecture enables a complete ecosystem, which will offer customers a host of software-based services throughout the full product life cycle. By 2030, the Volkswagen Group will put up to 40 million of its cars based on the new software stack on the streets of this world. The Group will have the largest amount of real-time data in the whole industry – and continuously improve its products on this basis.
Volkswagen’s grand BEV ambitions are not merely an attempt to transition successfully to the next phase of human mobility. They are also an attempt to establish a new phase of robust profitability for the company.
Volkswagen’s income statement might not reflect huge success immediately, but earnings should accelerate rapidly during the 2023-to-2025 timeframe.
Based on analyst consensus estimates, the company will book 2023 earnings per share (EPS) of about $3.25 per U.S.-traded share. From there, the consensus is expecting earnings to trend toward $3.50 in 2024 and $4.00 in 2025.
Obviously, no one can say with certainty what VW will earn two or three years from now. But I believe the company has the potential to surprise on the upside.
As VW rolls out a broader range of vehicles from all of its brands – and overtakes Tesla as the world’s largest BEV manufacturer – the German automaker’s stock could begin to attract a richer, “Tesla-like” valuation.
A double by the end of 2023 is well within reach.
Moving Forward
I’m so glad that you decided to further your journey to wealth by joining Smart Money.
While my method to purge your portfolio is sure to help you avoid pitfalls this year and beyond, this aren’t the only benefits of this free e-letter…
Nearly every Tuesday, Thursday, and Saturday, you’ll receive an email from me, wherein I’ll share insights on the latest market “megatrends,” how to look past the noise in financial media and understand what really matters, and more.
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Regards,
Eric Fry
Editor, Smart Money
