Volkswagen Gathers Investor Support, But EV Performance Needs Work

Volkswagen’s profit-making prospects are on the mend and there’s a grudging positivity among investors who have lived through a few false dawns over the years.

Moody’s Ratings has been doing its more conservative sums since VW announced its results for 2024 earlier in March and it’s a mixed verdict. Moody’s downgraded a long-term issue, affirmed a short-term one and changed the outlook to stable from negative.

VW expects its operating profit margin to increase to between 5.5% and 6.5% in 2025 compared with 5.9% in 2024. Sales will rise by up to 5%. In 2024, VW sales revenue rose 0.7% as global sales fell 2.3%. VW’s 2024 operating profit fell 15% to €19.1 billion ($20.9 billion) on sales of €324 billion ($354 billion).

Moody’s said VW’s operating performance will remain under pressure through most of 2026 because of –

• A low pace of sales growth and sustained upward pressure on prices, intensified by geopolitical uncertainties, especially tariff tensions.
• Structural challenges because of the transition to less profitable electric vehicles.
• Fierce competition in China, cutting market share and weakening profits.
• Investment in software, a prerequisite for success, but very risky.

HSBC Global Research rates VW preference and ordinary shares as “buys”.

“With the hard decisions largely behind VW, the challenge now is execution and initial results look encouraging. VW is not a quick fix scenario; it is a complicated colossus, but we see the prospect of gradual improvement as compelling,” HSBC said in a report headed “Small steps forward”.

Late last year VW announced a cost-cutting plan and attempted to streamline its politicized corporate structure. It had sought to close three German factories, but late last year union leaders declared a “Christmas miracle” because there were no immediate factory closures, layoffs or wage cuts. Volkswagen did announce more than 35,000 job cuts and a capacity reduction of more than 700,000 vehicles. VW agreed to keep 10 German factories running and retain job security until 2030 and planned to make €15 billion ($15.6 billion) in efficiency gains.

Investment bank UBS couldn’t bring itself to recommend buying VW shares, upgrading its advice to “neutral” from “sell”. UBS said in a report it wasn’t bullish on VW yet because business in China was still worrisome, it doubted VW’s ability to make profits from its new small EVs, the ID.2 coming next year and the ID.1 in 2037. It described the EV-centric U.S. strategy as the wrong product at the wrong time.

Investment researcher Bernstein, described VW’s position for investors as “Still in “show-me” territory”.

“What remains unresolved to our mind is VW’s ability to execute its strategy and to rein in what still appears to be profligate levels of R&D and CAPEX,” Bernstein said.

“This spending does not seem to have accelerated the launch cadence of critically needed vehicles, whether they be affordable BEVs for VW brand (ID.2, ID.1) or a 2nd generation ICE version of the Porsche Macan built on existing Audi underpinnings (2028 launch?),” the report said.

Newly provided guidance for VW brand cars illustrates just how far its targets have slipped. VW brand should achieve a 5.5% operating margin in 2027 and 6.5% in 2029 after 2.9% in 2024. Just under two years ago the 6.5% margin was set for 2026.

Investment researcher Jefferies was more positive, in its report headlined “On the Mend”. It rates VW a “buy”.

“We continue to see most indicators moving in the right direction and a convincing picture of top line preservation and previously unheard-of adjustments in cost and capacity. By protecting share and nurturing technical alliances to rein in capital spending, we think VW Group is building a sustainable global position in the industry transition,” the report said, with its “buy” recommendation.

Berenberg Bank retained its “buy” recommendation, saying it was impressed by cost reduction and inefficiency programs. New product momentum was impressive with about 30 new ones across all brands (VW, Audi, Skoda, SEAT/Cupra, Porsche) this year. The EU’s relaxation of CO2 emissions rules will save a lot of money too.

The EU has decided to ease the rules for CO2 emissions in 2025 by extending them for two extra years. VW was seen as the principal beneficiary of this concession with analysts expecting a €1.5 billion ($1.6 billion) hit to earnings before the EU Commission’s decision.

Moody’s reflected the general worry about VW’s attempt to ramp up its EV offerings.

“The transition to electric vehicles has been slower and more costly than expected, constraining Volkswagen’s profitability, as electric vehicles relative profitability is still lower compared to combustion vehicles,” Moody’s said.