Volkswagen: valuation moves into overtaking lane

Volkswagen is once again Germany’s most valuable public company. Shares in the carmaker this week climbed by almost a fifth, nearly regaining the pre-diesel scandal heights of 2015. Excitement was fuelled by more detail about its electric-car ambitions, including heavy investment in battery factories. It aims to be the global market leader by 2025 at the latest.

It will probably overtake Tesla, the current market leader, well before that. But car sales are not the full story. The US company’s enterprise value is nearly twice that of VW. The premium stems from software. That is expected to account for almost half Tesla’s post-2025 operating profits, according to UBS. Analysts see an analogy with Apple’s ecosystem of products, services and software. VW takes the role of Samsung, a hardware producer.

VW does not accept it is an also-ran on automotive software. It believes Europe still has a rare chance to play a leading role. In any case, some of the value ascribed to software, notably relating to self-driving technology, is overhyped. Cars are more than just smartphones on wheels. Repair and service networks, where Tesla lags behind VW in Europe, are critically important. 

Charging time also matters greatly. VW — which like Tesla has ambitions to halve battery costs — has placed a bet on next-generation lithium-ion batteries. Drastic cuts in the time needed to charge the battery are promised by the Silicon Valley start-up QuantumScape, in which VW holds a stake. But there is still a lot to do to industrialise the technology. 

VW shares, fewer than a tenth of which are free floating, according to Barclays, have been ramped up by enthusiastic retail punters, as well an institutional investors. Even so they do not look expensive, priced at just under 10 times forward earnings. That is cheaper than those of GM, another traditional carmaker pushing hard into electric vehicles.

VW has reason to cheer the rise in its share price. The higher value could make it easier to fund its electric vehicle ambitions. In its rivalry with US tech companies, VW understands that lofty valuations can bestow a competitive edge.