Amid heightening climate concerns, electric vehicle (EV) popularity is exploding. Taking cues from the red-hot EV behemoth Tesla (TSLA Quick QuoteTSLA - Free Report) and banking on the soaring adoption of green cars, many legacy automakers are pumping billions of dollars into clean mobility and ramping up electrification targets. One such auto giant that seems to be making great strides in the EV domain is Volkswagen (VWAGY Quick QuoteVWAGY - Free Report) .

In a recent interview with Financial Times, VWAGY’s CFO Arno Antlitz made heads turn with his statement - “The key target is not growth, we are [more focused] on quality and on margins, rather than on volume and market share.” This marks a reversal of stance from the company’s former CEO Martin Winterkorn, who aimed at Volkswagen’s global dominance in terms of volumes.

Why the Shift in Stance?

In the wake of coronavirus and massive chip dearth, Volkswagen was prompted to induce production cuts at many of its loss-generating/lower profit-generating factories. It prioritized allocating resources toward more profitable and expensive brands like Audi and Porsche. The strategy worked and Volkswagen posted solid 2021 results despite selling 600,000 fewer vehicles than 2020. Led by a better product mix and the rising average price of vehicles, revenues grew 12% year over year for 2021 to €250.2 billion despite a 6% decline in year-over-year sales volume. Operating profit before special items almost doubled year over year to €20.0 billion last year.

Volkswagen, which was once the crown jewel in terms of sales volumes, now believes that the strategy to concentrate solely on more profitable units rather than expanding in size would keep yielding solid results amid supply chain bottlenecks.

In sync with his strategy to give more emphasis on more profitable premium models, the company plans to pull the plug on dozens of ICE models by decade-end. Volkswagen targets to reduce the ICE vehicle line-up — comprising more than 100 models across several brands — by 60% in Europe within 2030. The move will also help Volkswagen reclaim its brand image that got distorted by the diesel-emissions scandal. As the company chooses to ax dozens of its models, it would benefit from a lesser number of platforms and shared technology to produce most of its vehicles, thereby boosting profitability.

VWAGY Bets Big on EVs

To switch gears to electric, Volkswagen would allocate more than 50% of total electrification spending for the first time. The auto giant has set aside 89 billion euros (a little more than $100 billion) for the development of EVs and future technologies by 2026. That would account for 56% of the company’s total investments.

In 2021, VWAGY sold 369,000 EVs including battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) worldwide, accounting for 7.5% of total vehicle sales of 4.9 million units. The company’s most popular BEV model worldwide is the ID.4. Of the total 263,000 BEVs sold by VWAGY in 2021, ID.4 accounted for 45%. Three new EV models were launched in 2021, namely ID.4, ID.5 and ID.6 in China. The ID. Buzz model debuted this year, whose deliveries are scheduled for the fall.

By 2026, the company expects green cars to account for 25% of total vehicle sales. Volkswagen expects half of the global vehicle sales to consist of battery-powered EVs by 2030, setting ambitious goals in an era of green transportation. The company also projects 100% of its new vehicles in major markets to be carbon-free vehicles by 2040. These targets are part of Volkswagen’s broader goal to be fully carbon neutral by 2050.

The massive expenditure of more than $100 billion is set to electrify Volkswagen’s European factories in Hanover, Salzgitter, Neckarsulm, Leipzig, Wolfsburg, Brussels, Pamplona and Martorell. VWAGY's Project Trinity has been confirmed for the Wolfsburg site. An investment to the tune of $2.2 billion has been earmarked for the site, wherein VWAGY will produce the upcoming all-electric, high-efficiency sports sedan called Trinity. The construction of the facility is scheduled to begin as early as the spring of 2023 and the rollout of the assembly line is slated for 2026. It would bring about significant innovations in range, charging speed and digitalization. Project Trinity is expected to considerably accelerate the automaker's EV production process and serve as the key catalyst in redefining Volkswagen’s potential to compete with Tesla, which has taken the EV market by storm.

Volkswagen also plans to accelerate the development of battery production capacities in Europe in order to meet the surging demand for battery cells. It is set to have six battery cell production gigafactories in operation in the continent by 2030, which would produce unit battery cells for their own use. 

The European auto biggie would invest $7.1 billion over the next five years in North America and add 25 EVs in the region by 2030, including the ID. Buzz. The ID. Buzz will be imported initially from Volkswagen's Hanover plant in Germany. The final version will be assembled in the United States or Mexico.

Is VWAGY a Good Addition to Your Portfolio Now?

Well, Volkswagen delivered on its NEW AUTO Strategy in 2021, enhancing the resilience of its business model in a tough macro-environment and laying the foundation for future growth. The company achieved a significant turnaround in key regions of the world. It has also successfully ramped up e-mobility and software capabilities, improving efficiency at the same time.

Looking at its valuation metrics, VWAGY seems to be trading relatively cheaper than its peers. At a 7.07 P/E, the stock is trading below the industry average of 10 and its median value of 9.21 over the past year. Investors should note that VWAGY has a P/CF ratio of 2.86. The company's current P/CF looks solid compared with the industry average of 5.55.

While Volkswagen appears to be a safe bet for long-term value investors, its near-term outlook seems clouded amid the Ukraine crisis. CEO Herbert Diess expects Volkswagen’s 2022 prospects to be hit by the Russia-Ukraine war in unforeseen ways. Russia’s attack on Ukraine has compounded supply chain issues and resulted in the shortage of parts and components sourced from Ukraine. Last month, Diess notified that the lack of wire harness, which plays a key role in connecting a variety of vehicle components, has overtaken microchips shortfall and has become the company’s major supply concern. It envisioned sales growth of 8-13% at the start of this year. But, Diess is now of the view that the geopolitical conflict has put its outlook into question. Diess also anticipates the commodity markets to remain volatile until 2026. VWAGY’s CFO Arno Antlitz expects escalating costs of raw materials to result in manufacturing inefficiencies and high production expenses.

Amid increasing instability and an uncertain environment in Europe, Diess has been contemplating to boost overall sales in China, wherein the company commands a huge presence. Volkswagen aims to double the sales of electrified vehicles in China in 2022. That too looks a bit uncertain now, as renewed coronavirus infections have triggered a lockdown in many cities in the country.

Considering these near-term headwinds, it’s better to get more clarity before adding the stock to your kitty. But if you are looking at a long-term horizon, this automaker seems to be moving in the right direction in terms of banking on the clean mobility trend and streamlining its business for profit growth.

Currently, Volkswagen carries a Zacks Rank #3 (Hold) and has a VGM score of A. While VWAGY’s earnings and sales estimates for 2022 imply a year-over-year decline of 7.7% and 1.2%, the same for 2023 points to growth of 10.7% and 3.6%, respectively. Its long-term EPS expected growth rate is 12.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.