Viewpoint: Porsche’s luxury image is looking threadbare

Is Porsche still a luxury brand? The question might seem ridiculous or even impertinent to someone yearning for one of its 911 sports cars that cost a minimum of US$130,000 (S$168,000), or more than $710,000 in Singapore, and considerably more for the most thrilling and customised derivatives.

But after warning on Sept 19 that it will barely scrape a profit in 2025 and announcing a big cut to its medium-term earnings ambitions, Porsche’s cachet – at least in the eyes of investors – is now very much up for debate.

The latest profit downgrade – the fourth in quick succession – undermines the German carmaker’s claim to have a luxury business model, with negative implications for the way the stock is valued. 

To recap, when Porsche first sold shares in 2022, it emphasised the uniqueness of its “luxury with scale” approach, combining the superior pricing power of high-end carmakers like Ferrari with the greater sales volumes of merely “premium” manufacturers such as BMW and Mercedes-Benz.

The word “luxury” appears about 300 times in Porsche’s initial public offering prospectus, leaving investors in little doubt about where Porsche’s management viewed its positioning on this exclusivity spectrum.

For a while, its strategy appeared to gain traction: The following year, it raised its long-term profit ambition to a 20 per cent operating return on sales.

But luxury is as luxury does, and since then, Porsche has done rather poorly. A combination of collapsing sales in China, the slower-than-expected uptake of electric vehicles, the United States’ 15 per cent import tariffs and a weakening dollar has hamstrung its earnings potential.

Having already lowered its medium-term profit guidance in March to between 15 and 17 per cent, from between 17 and 19 per cent, investors are now warned to expect somewhere between 10 and 15 per cent in future.

Adding insult to its injury, Porsche was ejected from Germany’s benchmark DAX index on Sept 22, signalling that in the eyes of the stock market, it is no longer a blue-chip firm.

Porsche’s management insisted on its investor call on Sept 19 that from both a product and financial perspective, it should still be considered a luxury company.

A business facing such severe headwinds would typically formulate a strategy to return profitability to prior levels.

However, the new medium-term guidance includes the various measures Porsche is already taking in an attempt to restore profitability: cutting jobs, reducing electric vehicle investments, extending the life of combustion engine models, offering new petrol-powered sport utility vehicles and elevating its 911 franchise via more derivative versions and greater customisation.

In other words, without its big strategy reset, Porsche’s future would be even bleaker.

The new operating margin corridor would suffice for a premium carmaker – Mercedes-Benz and BMW both aim for a roughly 10 per cent return on sales in the medium term – but surely Porsche should aspire to more? 

Ferrari’s operating margins exceed 30 per cent, while Lamborghini’s are above 25 per cent.

Porsche’s market value has declined by more than €70 billion (S$106 billion) since the 2023 peak to currently languish at about €36.8 billion, and analysts have already concluded it will struggle to regain prior profitability levels – the new guidance appears in line with their consensus estimates compiled by Bloomberg.

Still, investors may decide Porsche has far more in common with its German premium rivals than Italy’s prancing horse, further undermining its stock price.

Ferrari is valued at around 40 times its expected earnings in 2026, whereas BMW and Mercedes trade on about seven times earnings. Porsche sits precariously in the middle at around 16 times.

What can Porsche do? Although several top executives have been replaced, it is astonishing that after such a fall from grace, Porsche still shares chief executive Oliver Blume with its largest shareholder Volkswagen. (VW on Sept 19 separately disclosed a one-time hit to its operating results of more than €5 billion due to goodwill impairment and Porsche’s reduced profit outlook.) 

Porsche is reportedly hunting for a successor, but VW should have acted long ago to provide the 911 maker with a full-time driver. Alas, VW often plays by different corporate governance standards, to the detriment of its share price. 

Beyond that, Porsche appears resigned to a more modest future: The measures announced on Sept 19 are the “final steps” in the realignment of its product strategy, it insisted.

In a world of intensifying Chinese competition and higher trade barriers, there may be fundamental limits to Porsche’s earnings power. And Porsche may also be unwilling to countenance the deeper cuts needed to make the brand more exclusive. Or both. BLOOMBERG