Hey Porsche

by Overheard Wall Street May 1, 2023

Intro
Universe/Comparison
Porsche Business Overview
- Bulls
- Bears
- Key Metrics
Recommendation

Intro

Every kid dreams of owning a Ferrari.

And every dad going through a midlife crisis dreams of owning a Porsche.

Some of these dreams come to fruition… especially for the kids that got on the Bitcoin train at the right moment.

But these cars are more than just a car fanatic's dream. They are also very well-run businesses.

Most of the more common car manufacturers sell an enormous number of cars yearly with a relatively small profit margin.

We all know these cars – you can’t drive (or walk) down the street without seeing their names everywhere. And they aren’t really that special.

But what about the less common cars – the fancy ones that most of us stop and stare at a bit when we see (or hear them) coming down the street?

No shame. I love cars – I’ll stare all day!

Besides seeing these cars on the road, some of them may be top of mind as recently Volkswagen, owned by the Porsche family, just spun out their Porsche operations as a separate entity.

There is a lot of family history here, which we will dive into more further below - but Porsche has been itching to separate itself from Volkswagen for over a decade now.

And Porsche went public with a market cap of $72 billion.

Volkswagen’s market cap is only $100 billion.

How can a small division, producing a relatively small number of cars, make up ¾ of the market cap of a major brand?

Profitability.

Let’s dive into the luxury car brand market and look closer at Porsche.

Universe/Comparison

First, let’s try to compare a more common car brand to understand some numbers.

How do low-volume, luxury brand cars compare to big-name manufacturers?

In 2021, Ford delivered over 5.3 million cars, wholesale, to dealerships across the globe.

Often when you think of Ford, you might think about the dealership selling cars for more than they are actually worth.

The dealership will purchase cars directly from Ford for the wholesale price, and once the dealership owns the car it can sell it for any price the market will accept.

These price increases do not play into Ford’s revenue. Ford only receives revenue from their sales directly to dealerships and distributors, not to consumers.

Their revenue is derived from wholesale sales to dealers and distributors, parts for repair, and some financing revenue.

In 2021, their operating margin was 18%.

On $136 billion of sales, their operating costs were $111 billion.

Volume is Ford’s best friend here. It needs to sell more cars to more people to increase their profit margin significantly.

And specifically, it needs to sell more high-margin cars – like trucks.

Trucks have become some of the most popular cars on the road, making up 53% of retail sales in 2021.

Ford even made it clear in their annual filings that Truck sales are a huge focus, given their higher profitability.

It is also a large risk for Ford, as more electrified vehicles are demanded by consumers, this hurts their margins if it can’t continue selling combustion-engine trucks.

In 2021, Ford sold 721K trucks.

These trucks are not cheap for the consumer, either. Trucks are a big purchase with an average price of around $60K.

Ford doesn’t release these numbers, but several analysts have said that an average profit margin for Ford trucks stands around $10K per truck.

That means that in 2021, we can estimate that trucks made up 41% of Ford’s profit margin.

$7.2 billion of estimated profit on a total annual profit of $17.3 billion.

Contrast this behemoth with Porsche.

In 2021, Porsche delivered just 301K cars – in total.

Less than half the number of trucks that Ford delivered.

But Porsche sells luxury and performance vehicles that can have ticket prices much higher than $60K.

301K vehicles sold brought Porsche €33 billion in revenue.

That is an average sales price of €109K per vehicle.

Porsche’s operating margin stands at 27%.

On its €33 billion revenue, Porsche’s operating margin stands at €8.9 billion.

And its Net Income landed at €4.0 billion.

That is a healthy lead over Ford, who sold 17x more cars than Porsche.

Let’s dig into Porsche’s business a little deeper!

Business Overview

Understanding what lies under the hood is a key factor when buying a car. So, let’s look under the hood of Porsche to understand its business structure.

Porsche has solidified itself as a powerhouse both on the track and in the business realm.

They have created a unique position for themselves where the base price for their models is almost never the actual price that customers pay.

Porsche has created so many opportunities to customize and add to their cars, that the average vehicle sells for 20% above its listed market price.

And the top-of-the-line model sells for more than 2x the base price, on average.

This table, from Porsche’s August investor update, shows the range of prices for each of its most popular models.

The Taycan is Porsche’s newest addition to its lineup and the future of its brand.

As the world is shifting more towards EVs, Porsche invested heavily in 2019 to build a new factory dedicated to the production of the Taycan.

And that expense has paid off incredibly well – in 2021, Porsche sold more than 61,000 Taycans, which you can see above sell for anywhere between €88K and €191K.

Porsche is more than just an impressively fast car – it is also an efficient and profitable organization.

Bulls

Porsche has proven that it can take advantage of the shift in customer needs over time and still be incredibly successful. It has grown its business since 2008 to launch more SUV options, as SUVs have become more popular, and to launch an extremely impressive EV option that is dominating the market.

Since the launch of the Taycan, sales have increased 5x in China. As the middle class continues to expand in China, sales of EV cars are expected to continue growing as well
- The average owner of a Porsche Taycan in China is only 30 years old.
- The growth of the Taycan in China is extremely promising for Porsche’s growth, even as sales in China have slipped by 16% in 2022 due to lockdown and supply chain concerns.
While under the wing of Volkswagen, Porsche’s profit of €4 billion was 23.5% of the entire profit for VW in 2021.
- VW sold over 8.9 million cars worldwide, generating revenue of €250 billion in 2021. And yet, Porsche, who sold 300K cars, made up nearly 24% of the global car manufacturer’s bottom line.
Porsche sits in a very unique position when compared to other premium and niche luxury car brands. It sells more cars than the niche luxury brands like Aston Martin, McLaren, and Ferrari but at lower price points. Yet, it sells less cars at higher price points than competitors like Audi, BMW, and Mercedes-Benz.
- This position allows Porsche to continue differentiating themselves to a unique market that looks for both reasonable prices and high-performance luxury vehicles.

Porsche and Volkswagen are maintaining their strong synergies which will continue to allow Porsche to allocate capital efficiently as it expands operations deeper into the EV market.
- In 2019, Porsche built a factory dedicated to the Taycan. At the same time, it was able to shift production of the Cayenne to a Volkswagen factory, which saved them from needing to build another factory for Cayenne production.
- These synergies will continue to help them improve their bottom line and expand operations into the right markets. Porsche is targeting 50% of its sales will be from EVs in 2025.

Bears

The complex nature of the ownership structure behind Porsche provides some concern over the alignment of interest. With the Porsche family owning most shares in the company, an investor cannot always be assured that their interests and the businesses are aligned. The Porsche family may make decisions to support certain cars that have sentimental value but not strong profit margins. They may also make decisions to pursue strategic objectives that do not grow the business in the way that investors may want to see. The family may also make strategic objectives that are not feasible according to management and since the family has all the voting rights, this could cause other issues for the company.

This ownership structure presents another issue – voting rights.

Post-IPO, all voting rights live with the Porsche family. Investors who buy into to Porsche AG receive no voting rights at all.
This is not always the worst thing to see, as many public companies have super-voting shares reserved for founders, but it does present a concern towards the future growth of the company.
With key strategic moves relying entirely on family voting decisions, conflicts of interest are sure to arise.

CEO of VW, Oliver Blume, will also maintain his position as head of Porsche.
- We already saw conflicts of interest from the ownership perspective, but now we have conflicts arising from the management side as well.
- In the past, Porsche has lamented situations where it is compelled to go the direction dictated by VW.
- Now, with ownership and voting rights held by the Porsche family, but management still held by VW – it seems like the issues and concerns of the past may continue as well.

Key Metrics as of 10.6.22

Current Share Price: €90.72
IPO Price: €82.50
Cash: €3.8 billion
LT Debt: €6.4 billion

Conclusion/Recommendation

Porsche is not like the IPOs we have seen over the last few years where the company is struggling to reach profitability or create a name for itself.

The Porsche name and badge have global connotations. It is an extremely well-known brand for quality, price and performance.

While the ownership structure is complex and has the potential for conflicts of interest, the business is a well-oiled machine. It continues to create extremely high-quality cars that are in demand across the globe.

Porsche’s IPO is the largest IPO in European history and by all counts, it was a massive success. In trading this week, its market cap surpassed that of VW to become the largest publicly traded European car manufacturer by market cap.

The problem for US-based investors is that Porsche is listed on the Frankfurt stock exchange and currently has no US-exchange-listed option.

Be careful here – as we noted above the complex nature of ownership here makes this a challenging company to look up.

Porsche Holdings SE is traded over the counter and represents ownership with no voting rights in the holding company controlled by the Porsche-Piech family office.

Since Porsche AG just IPO’d, there is potential that we may see a US-listed option to trade in the future, but for now, if you want exposure to the performance and luxury car industry, you would be better off buying shares in Ferrari, which is publicly traded on the NASDAQ exchange under the ticker, RACE.