Stock of the week - Volkswagen (18.03.2021)

Volkswagen (VOW1.DE and VOW3.DE) is attracting a lot of attention this week, thanks to a gargantuan share price increase. While announcement of ambitious EV strategy is said to be that reason, it should be noted that Volkswagen has been on the move since the beginning of the year. Let's take a look at what has happened.

Results & forecasts

Volkswagen reported Q4 and full-2020 results earlier this week. Report was well received and showed full-2020 revenue of €222.88 billion, slightly higher than €221.19 billion expected. Net profit declined from €16.56 billion in 2019 to €9.48 billion in 2020 (exp. €7.37 billion). EPS dropped from €31.93 to €17.83. EBITDA declined from €31.34 billion to €23.37 billion. 

However, it was forecasts rather than results that caught the most attention. Volkswagen outlined key points of its EV strategy. First of all, Volkswagen plans to sell one million electric vehicles in 2021, split between battery vehicles and plug-in hybrids. Apart from that, German carmaker said that it wants to build 6 battery factories in Europe and a network of charging stations around the world. Volkswagen has already signed agreements for 2 factories and is exploring sites for the remaining 4. Last but not least, company's CEO Herbert Diess said that Volkswagen aims to overtake Tesla in terms of battery EV sales by no later than 2025. Management of Volkswagen seems to have embraced the strategy developed by Elon Musk's Tesla as the US carmaker has also decided to make big investments in battery factories.

Volkswagen sales dropped almost 12% in 2020 while net income declined 36.1%. As a result net margin dropped from 5.5% in 2019 to slightly below 4% in 2020. Source: Bloomberg, XTB

Retail investors fuel rally?

While upbeat results and optimistic forecasts can be seen as a potential reason behind the rally in Volkswagen shares, it does not seem to be a "broad" rally. It seems that recent steep price gains were driven by retail investors, especially from the United States. Why? Volkswagen has two classes of shares available for trading - common (VOW1.DE) and preference (VOW3.DE). Institutional investors prefer preference shares as they are more liquid (around 90% of Volkswagen's common stock is held by three top shareholders and is unavailable for trading). This is also the class of Volkswagen shares that is included as a DAX member. Meanwhile, a recent rally on Volkswagen shares was to a huge extent limited to the company's less liquid common stock. Important feature of Volkswagen's common stock is that it is being used to hedge ADRs - financial instruments offered in the United States that allow investors to get exposure to non-US stock and are backed with that non-US stock.

Less liquid common shares of Volkswagen (VOW1.DE) outperformed preference shares (VOW3.DE) and DAX (DE30) significantly this year. Source: Bloomberg, XTB

Volkswagen's common stock has rallied around 80% so far in 2021 while company's preference shares jumped around 50% YTD. High interest in Volkswagen ADRs has led to a strong demand for the company's common stock and has created arbitrage opportunities. As those opportunities were exploited, Volkswagen's preference shares moved higher as well. Volkswagen shares have been trading in a strong upward move since the beginning of 2021 but what we have seen this week was just a pure madness. As trading is focused on the less liquid class of stock that is somewhat available for the US investors, it seems that Volkswagen is going through a GameStop-like situation. Having said that, investors should be cautious when trading Volkswagen stock. Of course, there is a fundamental reason behind recent price gains but the rally looks fragile and may end with an abrupt correction.

Volkswagen preference shares (VOW3.DE) rallied over 20% this week. Stock broke above the upper limit of the upward channel and reached a high at around €250 - the highest level since March 2015. Strong upward move was launched following a break above the €190 resistance zone. Meanwhile, the company's common stock surged over 40% this week alone. Nevertheless, preference shares are the more liquid ones and are used to calculate DAX contribution. Source: xStation5