Forget NIO and XPeng. This company and Tesla will be the top 2 electric-vehicle plays by 2025, says UBS

Electric car
Tesla leads in a few critical technical areas, including software and ‘ruthless engineering’

Forget NIO NIO , XPeng XPEV , and other flashy electric-vehicle stocks, because within the next four years it will be Volkswagen VOW competing with TeslaTSLA for the crown of most EV sales globally, according to UBS.

The Swiss bank recently increased its forecast for how quickly electric vehicles will be adopted, and is now predicting that EVs will penetrate 100% of the automobile market by 2040. That makes the battle to be the most dominant car maker worth hundreds of billions of dollars.

UBS UBSanalysts said in a call with members of the media on Tuesday that they predict that, within the next few years, Tesla and Volkswagen will be the two global leaders in electric-vehicle sales. The analysts expect that Volkswagen will catch up with Tesla in terms of total volume of cars sold as soon as next year, when the two companies could each deliver around 1.2 million cars.

Volkswagen Group is a German automobile giant that owns brands including Audi, Porsche, Bentley, Bugatti, and Lamborghini. In the past year, the company has raced past Tesla to become the most dominant electric-vehicle group in Europe — the world’s largest EV market behind China. Volkswagen controls between 20% and 25% of the market share in this key region.

The German group also provides a model for legacy car makers looking to get into electric vehicles, with UBS calling Volkswagen the “best EV transition story” in the global auto manufacturing space.

“We think now is the time to be all-in as a car maker,” said UBS analyst Patrick Hummel on Tuesday. “It is about gaining scale as fast as possible, because scale is going to be a driver of profitability.”

UBS predicts that, by 2025, there will be manufacturing cost parity between electric and nonelectric vehicles, compared with a $5,000 cost difference in 2020 for more-expensive EVs. The average operating margin for EVs should grow to 7% by that time, from 1% in 2020 — which means that there will be margin parity between EVs and conventional cars within the next four years.

UBS analysts raised their target price for Volkswagen stock on Mar. 2 from €200 ($237) to €300. With the shares trading on Monday at around €191, the Swiss bank believes the stock has legs to climb 57% higher in the next 12 months.

The key area that Volkswagen leads Tesla on, according to UBS, is that it has the best scalable EV platform.

“We use the analogy from the tech space, calling Tesla the Apple AAPL of the future mobility space, because of an admired piece of hardware in combination with a cutting-edge software ecosystem,” wrote Hummel and other analysts in a report on Mar. 2.

“Volkswagen is well positioned for a value proposition like Samsung 005930 — a global brand trusted for its high-quality hardware, produced at scale. This won’t get VW to Tesla’s valuation spheres, in our view, but still offers significant upside from here,” they added.

Tesla still leads Volkswagen in a few critical technical areas, according to UBS. The most relevant lead for the long term is in software, but Tesla also beats out Volkswagen with its integrated electric powertrain, “ruthless engineering,” digitization, and autonomous driving features, said the UBS analysts.

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