Stock of the week: Why going green makes sense for VW, and what to expect from Netflix

The focus this week has mostly been around US banks and their earnings releases, however, there are some interesting developments in Europe. The EU unveiled its most ambitious plans to date to boost its green credentials. This includes a ban on new diesel and petrol cars from 2025, a tax on aviation and maritime fuel and a plan to phase out free pollution credits from 2026. Although nothing has been put into law yet, the industries’ most heavily affected hit out at the plans, however, Volkswagen was a lone voice in supporting the EU in its latest move.

VW gets ahead of the game in electric vehicles

Volkswagen announced earlier this year that it would accelerate its battery powered vehicles to account for 70% of sales in Europe and 50% in the US and China by 2030. Although the EU’s targets for electric or alternative car production needs to be in place 5 years before then, there can be no denying that compared to other car makers in Europe, Volkswagen has an edge when it comes to the scale of its proposed electric vehicle production and thus, it will be easier for it to achieve the EU’s objective.

Back in March, Volkswagen launched its new “accelerate strategy”, which is increasing the speed of VW’s digital and electric future. VW’s “Trinity project” is aiming to design an all-electric sedan, which it hopes will be the gateway to Europe’s electric vehicle future. The Trinity Project will be built in Germany and is scheduled for release in 2026, however, VW will likely be at pains to get this model ready for sale a year earlier now that we know the EU’s targets.

This is quite the turnaround for VW after the vehicle’s emissions cheating scandal in 2015, which prompted a shift to the zero emission and self-driving technology. While VW had been a laggard when it came to electrification, it is now leading the way for Europe.

While Volvo and Stellantis – the owner of Fiat, PSA and Chrysler – are aiming for fully electric or hybrid models of all of its vehicles by 2025, VW is bigger than both of these companies. Due to this, we think its share price could benefit the most over the long term. Added to this, the pressure on microchip production, a key component of electric vehicles, means that prices are likely to remain elevated for new electric vehicles in the coming years. As they become a must-buy for the European consumer, this could boost the bottom line for EV producers like VW.

Car makers vs. airlines

While VW is likely to do well in comparison to other European car makers, for those looking for an arbitrage trade, we think that VW could outperform the European airlines including IAG and Lufthansa, who both complained bitterly about the EU announcement. It is no wonder, considering the devastating impact of the pandemic on the airline sector, and the rise in aviation fuel taxes could weigh further on the sector.

Lufthansa said that Europe was putting its aviation sector on the back foot as other nations had not followed suit, while the head of IAG said that the EU had shot itself in the foot. Overall, the airlines have struggled versus the car makers this year, and we expect this trend to continue in the medium term, as the car makers adapt better to the latest EU green energy plan. See chart 1 below.

Netflix likely to disappoint, but don’t worry too much

Netflix is also on our watch list this week as we wait for its earnings release for Q2. It’s share price had started to climb in June, but it stalled in July. It will be interesting to see how it reacts to the latest Q2 earnings data that is released on 20/7. The surge in demand for Netflix subscriptions in 2020 has undoubtedly hurt the pace of new subscribers in 2021, the streaming service is expected to add 1 million new subscribers last quarter, which would be the smallest number of new subscribers for 5 years. However, we believe that Netflix can easily swallow a “weak” quarter for these reasons:

• It already has 208 million subscribers that generate $20bn in revenue each year.
• It is the number one streaming service by number of subscribers.
• While some worry about competition in the area, it has the financial firepower to produce regular new content that keeps existing and new subscribers hooked to the service.
• Its profit margin has increased massively in recent years, from 1.4% in 2012 to 18.3% in 2020. These are the type of margins that keep investors excited!

Overall, when it comes to streaming providers’ earnings, the focus is on new subscriber numbers. If this falls short for Netflix, we anticipate that this will weigh on the Netflix share price. However, that could be used as a good buying opportunity, as Netflix tends not to lose subscribers due to its superior and vast content library, thus its monthly fee structure means that revenues are likely to stay strong for the long term. Once the market gets over a weak reading for Q2 subscriber growth, we expect to see Netflix jump, with $600 the long-term resistance level to beat.

Chart 1: Europe’s car makers vs. airlines. Volkswagen diverged from Europe’s largest airlines back in March, when VW announced its green strategy. We expect this divergence in performance to resume once more now that the EU has laid out its ambitious green plan.