Volkswagen plans to sell 25% of Porsche with the luxury carmaker expected by analysts to achieve a valuation of between €60 million and €100 million. If the eventual IPO valuation falls in the middle of that range, Porsche will start life as a stand-alone public company worth €80 billion.

Despite selling 8.8 million vehicles in 2021 to Tesla’s 1 million, Volkswagen is currently worth just €86.81 billion and Tesla $906.39 billion (€897.38), which is over ten times higher. That also suggests Porsche alone, is worth almost as much as the entire Volkswagen Group including Porsche itself plus the VW, Seat, Skoda and Audi.

Does that mean Volkswagen, minus Porsche, is worth just €6.81 billion? Of course not. While the high margins on luxury Porsche models mean the marque accounts for 30% of the group’s profits despite selling only 300,000 vehicles, the rest of the group still looks heavily undervalued.

Volkswagen is also only selling 25% of Porsche. Half of the potential €20 billion that will raise will be invested in developing electric vehicles (EVs), in which VW has pledged to invest €73 billion. The other half, for argument’s sake €10 billion, will be returned to shareholders as a special dividend. Not a bad one-off windfall from a company worth only 8.8 times that.

Volkswagen will also still own 75% of Porsche, potentially worth €60 billion. Logic seems to dictate, then, that it would be insane not to invest in VW at its current valuation. So where’s the catch? Why are markets valuing the world’s biggest car company by sales so modestly?

Could the Porsche IPO go badly wrong?

One obvious explanation as to why the Volkswagen share price is still so lowly despite the impending Porsche IPO is that markets expect it to fail to meet its target range. It does seem a poorly timed float with markets amid a slump, runaway inflation and a recession presumed pending.

The presumption must be there is a significant risk VW will pull out of spinning off Porsche if its IPO fails to drum up interest at a level the parent company feels offers shareholders fair value. But Volkswagen insists the IPO will go ahead with new CEO Oliver Blume this week confirming the listing is planned for either late this month or early next month. He bullishly commented:

“There’s a lot of capital in the market and we think that the Porsche IPO could be an icebreaker . . . and show what’s possible.”

Retaining a 75% ownership stake, the Volkswagen share price will continue to be heavily influenced by the performance of an independent Porsche. How might it perform in the tough economy the near term seems likely to represent and over the medium to longer term?

Bullish analysts think Porsche might do rather well as a stand-alone company, pointing to the near 500% increase in the value of Ferrari since it was spun out by Fiat Chrysler in 2015. Only 10% of Ferrari’s equity was listed compared to the 25% planned for Porsche.

We have to be somewhat careful when comparing Ferrari, whose average sale is worth €200,000 compared to around half that for Porsche. But only 11,115 Ferraris were sold in 2021, even if that represented year-on-year growth of 22.3% on the 9119 cars sold in 2020.

As mentioned, Porsche sold around 300,000 vehicles last year. That represented growth of 11% of 2021 numbers which, while around half of Ferrari’s growth, was a very healthy performance.

The Porsche model that saw the best growth in sales numbers between 2020 and 2021 was the all-electric Porsche Taycan which more than doubled its delivery numbers from the previous year to 41,296 units. The sports car icon, the 911, was also handed over to more customers than ever before with 38,464 deliveries. The Panamera saw 30,220 deliveries. The 718 Boxster and 718 Cayman were delivered to 20,502 customers. Margins reached 20% in the first half of the year and are improving rather than being squeezed by inflation and supply chain issues as is the case for more mainstream marques.

Porsche is in a very good moment thanks to its new SUV lines and luxury goods are typically far less impacted by economic turbulence than mid-market and budget equivalents. That historical trend has also traditionally held true for more expensive items like cars.

So what are the main doubts investors have about the Porsche IPO? A big one is governance. The new Volkswagen chief executive Oliver Blume, who was appointed in July after the prickly Herbert Diess was ousted by the company and only took up his role a couple of weeks ago will still also head up Porsche at the time of its IPO.

It would normally be expected that a separate Porsche chief executive be appointed and a recent poll by the stock broker Bernstein found 58 out of 71 fund managers surveyed disapproved of the dual role. While there have been assurances that “robust processes to avoid conflicts of interest” will mitigate any issues with both companies having the same CEO, market participants and analysts are not convinced.

There are also unknowns around how Porsche will perform in the longer term as a stand-alone company. Electrification will continue to require huge investment and Porsche is likely to rely heavily on technology developed by its majority owner. Matthew Bennett, associate head of Coventry University’s School of Strategy and Leadership and a former car executive also comments on additional factors:

“Porsche needs to retain … the back-office tech and functions from VW Group, which make the independent operation profitable. That’s how Ferrari are doing it [with Stellantis, the successor to Fiat Chrysler]. And Aston Martin … is struggling with it.”

Speaking of Aston Martin, another stand-alone luxury marque, the British carmaker serves as a warning as to how it could potentially go wrong for Porsche. Its 2018 IPO is seen as one of the worst listing failures in history and the company has been forced to raise fresh funds from shareholders and new investors. The American EV company Rivian has also lost three quarters of its value since going public last year.

In Porsche’s favour is the strength of its brand and buyer loyalty to it as well as its growing sales numbers, revenues and margins. Aston Martin’s float was the latest instalment in a long history of failed attempts to turn the company around and achieve profitability. Porsche is in the middle of what looks like a strong upwards trajectory.

If the Porsche IPO and the company’s subsequent performance do not flop badly, Volkswagen’s valuation should also benefit considerably. Only 25% of the former’s equity being floated could mean a conglomerate discount continues to weigh on both share prices but presumably to a much lesser extent than at present.

VW’s margins and profits will fall without Porsche but with a strong pipeline of new EVs and economies of scale, the company, like all traditional carmakers, still looks very undervalued compared to Tesla. The latter’s valuation seems to rest on the presumption it will continue to dominate the EV market but it seems unimaginable that Volkswagen will not also be a major player and even exceed the former’s market share.

Recession, inflation and continued supply chain issues may continue to weigh on Volkswagen’s valuation in the near term. But even if Tesla’s valuation drops back to a level that is somewhat more tethered to the American EV maker’s fundamentals, the vast size of the gulf between it and those of rivals like VW suggests plenty of potential upside for the latter in future years. Especially if Volkswagen’s EV sales are going well at the point bullish sentiment returns to markets.

If Porsche also does even reasonably as a stand-alone company with VW still owning 75% of it, it’s difficult to see how its still parent-company does not currently represent potentially outstanding value.