The Porsche IPO and Mass Luxury
Some deals are opportunistic—a big M&A transaction after a crash, or a burst of IPOs when the market is strong. And some deals, particularly bigger ones, have their own internal logic, which can't afford to slow down regardless of what the global economy or the stock market is doing.
If you were trying to time the IPO of a big German sports car company, you’d want to do it any time but now, in the midst of:
- Covid lockdowns in their biggest, fastest-growing market
- A looming energy shortage in Germany, where they make most of their cars
- A weak stock market flowing through to lower luxury demand
- An EV transition Germany under-indexes to
- Rising prices for the raw materials that are essential to that EV transition
And yet, here we are. In a few days, Porsche will be a publicly-traded company, with 911 million shares outstanding, and a market value at the midpoint of its price range of €72bn. Investors in the deal aren't getting voting rights, which will reside with Porsche's parent company, Volkswagen, whose largest shareholder Porsche-Piëch family.1 It is, at least by US standards, not a very clean governance situation and not a clean spinoff: in addition to the controlling shareholder, Volkswagen also has two board members representing the government of the State of Lower Saxony, which owns about 12% of the business. And Porsche and Volkswagen will retain some shared projects, including R&D and production.
So what's being sold isn't quite a complete company, and it isn't exactly being sold. But it's still a unique asset. Porsche sells cars for an average of €100k apiece, at a time when the global median price of a car is $28k. They're a luxury brand, and they're selling to an affluent audience. Their European customers earn around $376k, their Chinese customers make $484k, and their US customers $600k. (It's a testament to globalization that a) there are so many people in China earning mid-six figures USD, and b) that at 32% of sales, they're the largest end market for a German brand.)
Their premium price point hasn't forced them to be stingy with production. They sold 302k vehicles last year. To put this in perspective it's more than four times the combined sales of Maserati, Aston Martin, Lamborghini, Bentley, Ferrari, McLaren, Rolls Royce, and Bugatti. Within the luxury segment, they're the mass-market brand. Like other high-end brands, though, they have some pricing power. They produced EBITDA of ~$25k/vehicle, compared to ~$135k per car for Ferrari. Earning 18% of the unit profit on 27x the volume has been a good way to approach the business. Stacking them up against the rest of the automotive industry (excluding Tesla, the Universal Outlier in all comp tables), they actually end up quite close to Ferrari in terms of margins—their EBITDA margin excluding financing was 24.5% last year, compared to Ferrari's 30.8%, and compared to most of the rest of the industry in the low teens.
(People who care more than I do about cars and luxury goods may debate whether the company counts as a luxury brand given that, if it does, it's most of the luxury auto market. It is worth noting that they do a "limited edition" release most years. This is a tiny share of their unit volume, 0.2% to 0.4% of sales. But it's evidence that they can engineer some scarcity value for the brand, even if they have sold over a million units of the 911 since 1964.)
The prospectus highlights growth of 8% compounded since 2019. Looking back at their 2011 annual report, from before they merged with Volkswagen, their growth over the subsequent ten years was actually a bit faster: revenue grew 12% annualized, while deliveries grew 10% annualized over the same period. So they've been able to push prices up a little while nearly tripling their sales. Their operating margin deteriorated slightly, from 18.8% a decade ago to 16.0% last year, but it remains healthy.
When a company goes public while it's in the middle of a transition, it always raises the question of why they're not going to wait until there's a clear path forward. Porsche is targeting a 50% EV mix by 2025 and 80% battery EVs by 2030. The Taycan is their flagship electric vehicle, and it was 72% of their unit growth in 2021. And there's an increasing EV mix to the rest of their fleet; the Cayenne, their bestselling vehicle year-to-date, has nine ICE versions and four hybrid ones. Looking at where they're spending as a leading indicator of what they're selling, and the picture is even more electric: 73% of their R&D spending this year was for electric vehicles, up from 40% in 2019.
There are some things that won't translate easily from an internal combustion world to a battery-based one, but brand names certainly do, as does most of the design that's directly experienced by the owner (rather than indirectly viewed when the vehicle does or doesn't fall apart, or that affects what kind of profit margin it produces). In one sense, the cheaper brands have to earn their EV credentials with every new release, while more expensive brands, selling to a more affluent and carbon-obsessed audience, have a bit of leeway. And in a competitive industry, relative position can matter more than absolute position, so if the automotive industry is shifting to a new model, the fact that some competitors won't survive is good news for the ones who probably will.
Which also makes the macro timing of a Porsche IPO more sensible. High-end brands may die during recessions, but they usually don't die because of recessions. The fatal illnesses that they contract have a long incubation period. Brand recognition has momentum over time, and one thing that can keep a brand alive for a while is that going downmarket tends to increase sales first and hurt gross margins later on.
This is something the company is quite aware of. At Volkswagen's investor day earlier this year promoting the deal, they didn't kick off with a discussion of batteries, drivetrains, or new models. They started by talking about brands. Their head of design described it like this: "You buy an entrance ticket, a membership card to a specific community, you become part of a family, you become a tribe member." That can be good or bad; the Groucho Marx principle—“I don't want to belong to any club that would accept me as one of its members.”—can apply. But the product decisions they make actually give them some leeway to admit a few new members. (Which they are in fact doing: 60% of Taycan buyers are first-time Porsche customers.)
The luxury business seems to have a formula: make it exclusive enough and it doesn't need to be all that nice; make it nice enough and it doesn’t have to be all that exclusive. And it’s more satisfying and more sustainable to make it nice than to make it exclusive.
Further reading: The Diff previously covered the auto industry's transition towards EVs and autonomous vehicles ($), and Ferrari got a writeup last month ($).
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It does not exactly avoid confusion here that the family holding company, which owns 31% of Volkswagen, is Porsche Automobil Holding SE. The company going public is Porsche AG. ↩
A necessary exception here: some strategies produce high dollar returns, but only on huge capital bases. A long/short strategy in bonds can also work as a long-only strategy that provides better returns on a much bigger portfolio of bonds. And if the portfolio managers can point to a credible record of repeatedly beating an important benchmark year after year, they will eventually be able to earn fees accordingly, even if those fees aren't technically structured as a performance fee. So the generalization of how people get paid partly assumes a market where it’s as easy to go long as it is to go short, optimal leverage is accessible, and there aren’t regulatory or industry factors that require participants to be a particular size. ↩