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As the electric vehicle sector continues to expand rapidly, Wall Street is keeping a close eye on it Volkswagen (OTCMKTS:VWAGY) ahead of Porsche’s eagerly awaited IPO. Analysts expect a Porsche stock debut to spur VW’s ambitious entry into electric vehicles. But with Tesla (NASDAQ:TSLA) continuing to buck funding and production expectations, VW has something of an uphill battle ahead. Can a Porsche IPO really allow VW to keep up with Elon Musk’s automotive superstar?
Investors have been clamoring for an IPO for Porsche practically since 2008, when the brand was first brought under VW in the infamous takeover. But it seems the time of reckoning is finally here.
VW leadership has repeatedly hinted at taking their most desirable automaker public, and recently even singled out banks to coordinate the move. Some analysts are even predicting that Germany’s most profitable car brand will go public as early as the fourth quarter of this year.
Many expect the move will put VW’s EV aspirations into focus, especially given Porsche’s resounding success in the field. Porsche’s Taycan model is one of the most commercially successful – and critically acclaimed – VW electric vehicles ever produced. In 2021, the Taycan doubled its sales compared to the previous year. The car even outsold the 911, Porsche’s most iconic sports car, as well as Tesla’s top-of-the-line S.
But Tesla is, well, Tesla. The company dominates the North American electric vehicle industry and continues to expand its international presence. It currently holds a massive 75% share of the U.S. electric vehicle market. Though Volkswagen has been at the forefront of automotive excellence for nearly a century, when it comes to electric vehicles, Volkswagen is undoubtedly the “David” to Tesla’s “Goliath.”
Electric vehicle sales continue to accelerate each year, and with current supply shortages driving fuel costs to record highs, many analysts expect the EV transition to accelerate even further. Current consensus estimates project that EVs will account for more than half of all US vehicle sales by 2030. Electrification is undeniably the way forward, presenting both opportunities and potential obstacles for both legacy and emerging automakers.
As older companies quickly transition to electric propulsion systems, there’s a clear race ahead for who can claim the EV throne. VW — and its many subsidiaries — could be Tesla’s closest competition. Globally, Volkswagen continues to lag behind Tesla, owning around 10% of the EV market, compared to Tesla’s nearly 21% share. A Porsche IPO could be VW’s best chance of securing the funding needed to power its electric transition.
So should the idea of a Porsche IPO keep Musk up at night?
Volkswagen is targeting Tesla production metrics with Porsche IPO
Arguably Tesla’s biggest advantage over other electric vehicle manufacturers is its manufacturing capacity. With the continuous expansion of the locations of its gigafactories, Tesla is in a class of its own in vehicle production.
With its patented “Megacasts,” the company can produce one of its Model Y in just 10 hours. For context, Volkswagen estimates that it can achieve similar production metrics by 2026. It currently takes VW three times as long to produce an ID.3 vehicle, one of its smaller electric offerings.
However, according to IHS auto analyst Stephanie Brimley, the EV race is a “marathon, not a sprint.” Brimley spoke recently InvestorPlace on VW’s electric prospects ahead of a potential Porsche IPO. According to the analyst, it’s important to view the EV battle in the context of a long-term technological transition from internal combustion engines to electric motors.
“We’re at the very beginning and Volkswagen’s products have been doing pretty well, and Rivian and Lucid and the like have yet to build their own scale and manufacturing base, and they’re doing so at the same time as VW is expanding its manufacturing footprint. The more you focus on the next three years, the easier it is to forget that we are actually talking about a 15 to 20 year project.”
As Brimley argues, it’s far too early to crown any company the EV king. The next few years are likely to be characterized by rapid production optimization and rapidly evolving consumer tastes. That being said, the first mover advantage is still alive and well.
To say that Tesla has something of a lead in the EV race would be taking it lightly.
Unlike old automakers, Tesla’s manufacturing facilities were always to produce electric cars. Competitors will likely need to spend significant time and capital revamping their factories to better accommodate EV production. But according to Brimley, this leaves neither Tesla nor its old rivals in an outright winning position.
“Tesla and Co. don’t face the challenge of transition, but they face the challenge of growth. They face the challenge of building a manufacturing, distribution and branding network that spans the globe, and VW has 12 or 13 brands. It’s a massive thing they’ve grown over a hundred years, give or take. That size and range can make it a bit slower to move at times, but once you start moving there’s a lot to do there and the smaller and newer manufacturers have a lot to build on as well.”
Tesla recently opened its first European gigafactory in Berlin. The facility is just over 100 miles from the country’s largest car factory, Volkswagenwerk Wolfsburg, which also functions as VW’s headquarters.
VW is certainly feeling the heat as Tesla launches one of its engineering marvels so close to its historic home base. But to say that VW doesn’t have its own competitive advantages in the EV race would be a gross misrepresentation of its potential.
A Porsche IPO could give investors access to an EV powerhouse
It’s hard to overstate Porsche’s value to Volkswagen. Although Porsche produces only about 3% of the Volkswagen Group’s vehicles, Porsche accounts for more than a quarter of VW’s operating profit. The luxury brand enjoys industry-leading margins on its sports-focused vehicles, so much so that VW is willing to sidestep its complicated ownership structure to expand the brand.
In fact, VW’s decision to list Porsche was probably in part a decision by the Porsche family, shareholders of Volkswagen. The Porsche and Piech families, today’s descendants of the founder of the same name, Ferdinand Porsche, hold a 31.4% stake in Volkswagen. They also control 53.3% of the group’s voting rights. The families administer their property through Porsche SE (OTCMKTS:POAHY), a holding company controlled by them. This is not to be confused with the Porsche Auto Group (AG), which represents the vehicle manufacturer itself and the Porsche brand. For reasons of clarity, all mentions of a Porsche IPO refer to Porsche AG.
For IPO purposes, VW has joint plans to split Porsche’s ownership into common and preferred (non-voting) shares. VW will retain all of the common stock on the condition that Porsche SE – operated by the Porsche and Piech families – buys about 25% of Porsche’s common stock at a premium of 7.5% over Porsche’s IPO price. Up to 25% of the Porsche preference shares are then to be listed.
Ultimately, only between 12% and 15% of the entire company remains for public ownership. Additionally, the preferred shares on offer will carry no voting rights, which could be disappointing for activist investors looking for decision-making power in the company. However, this also limits possible outside interference, allowing Porsche to focus on what it does best: building cars.
With this in mind, the long-term benefits of a public offering should not be overlooked. An IPO gives Porsche and VW the immediate funding needed to expand their EV catalogue. Currently, Porsche’s only electric models are the Taycan, a sporty sedan, and the Macan, a crossover SUV similar to Tesla’s Model Y. Rumors are already circulating about the possibility of an all-electric 911, Porsche’s flagship sports car.
On the VW side, the funding could prove just as useful to ramp up production of electric offerings. This also includes the much-anticipated ID.Buzz electric motorhome, which is currently scheduled to be launched in North America in 2023. In addition, VW’s successful ID.3 hatchback and ID.4 SUV models consistently rank high in EV sales. The IPO could give VW the cash it needs to advance its all-electric future.
Early estimates put Porsche’s potential market cap at nearly $100 billion. That puts those in the shade Mercedes Benz, bmw and General Motors (NYSE:GM) and thus one of the largest IPOs in Germany of all time. Should it actually end north of its estimate, Porsche could end up just overshadowing VW’s $104 billion valuation. Now, that doesn’t exactly close the gap to Tesla’s nearly $1 trillion market cap. But Porsche’s listing should certainly add some additional funding power to fuel VW’s rapid EV expansion.
VW dives headlong into uncharted waters
It’s no coincidence that in the midst of what may be the greatest technological shift in automotive history, VW decides to bring one of its most prestigious brands to the public.
Volkswagen owns about a dozen car brands and could have included almost any of them at any point in the past decade. VW makes a strategic decision to bring Porsche public, one that could prove to be a game changer in the long run. EV expansion is far from over, but the notion that Porsche could be the stepping stone for VW to challenge the Goliath Tesla remains significant.
In the future, all eyes will be on VW and Porsche. The next few years could well lay the foundation for a new generation of EV leaders for decades to come. VW’s decision to list Porsche is the culmination of almost a century of automobile production and branding. Even amid mounting supply chain problems and mounting recession worries, VW hasn’t budged a bit on its proposed Porsche IPO. This is largely a testament to VW’s commitment to its vision for the brand.
VW is perhaps the most ambitious legacy automaker in its efforts to catch up with Tesla’s EV royalties. As both Tesla and VW push new frontiers in electric vehicle innovation, Porsche’s upcoming IPO will make the race to the top all the more interesting for investors and car enthusiasts.
At the time of publication, Shrey Dua held no position (neither directly nor indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.
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