Volvo's Struggling EV Transition and Overvaluation Risks: A Cautionary Investment Analysis

The automotive industry's shift to electric vehicles (EVs) has become a high-stakes battleground, and Volvo Cars, once a symbol of Scandinavian innovation, now finds itself at a crossroads. While the company has long positioned itself as a leader in sustainability, its EV transition has been marred by declining sales, margin pressures, and strategic missteps. This analysis examines the risks to Volvo's long-term profitability and questions whether its current market valuation adequately reflects these challenges.

Financial Performance: A Tale of Two Quarters

Volvo's financial results in 2025 reveal a stark contrast between quarters. In Q3 2025, the company reported a group operating income of SEK 6.4 billion, with an EBIT margin of 7.4%-a modest improvement from 6.2% in Q3 2024. This gain was attributed to cost-cutting measures under its SEK 18 billion cost and cash action plan, including workforce reductions and streamlined operations. However, Q2 2025 painted a grim picture: a group operating profit of SEK -10.0 billion, driven by a SEK 11.4 billion impairment charge linked to the EX90 and ES90 platforms and restructuring costs. Excluding these one-off items, the EBIT margin improved to 3.1%, but the underlying trend remains concerning.

The EV segment, while a strategic priority, has not delivered the expected financial resilience. Fully electric vehicle (EV) sales accounted for 22% of total deliveries in Q3 2025, down from 25% in the same period in 2024. In November 2025, global EV sales rose 4% year-on-year but still represented only 24% of total deliveries. Meanwhile, the broader electrified segment (including plug-in hybrids) saw a 5% decline in sales. These figures underscore a shrinking premium EV market and intensifying competition, particularly from Chinese automakers like BYD.

Strategic Missteps: Software Delays, Tariffs, and Impairment Charges

Volvo's EV transition has been plagued by operational and strategic errors. The flagship EX90 model, delayed by over a year due to software development issues, became a symbol of the company's struggles. According to a report by Reuters, the EX90's software problems-including malfunctioning digital keys and infotainment glitches-led to a $1.2 billion impairment charge in Q2 2025. The ES90, built in China, faces unprofitable sales in the U.S. and Europe due to tariffs as high as 247.5%. These challenges have forced Volvo to shift production from China to Europe and delay its full EV transition beyond 2030.

The root of these issues lies in Volvo's fragmented software development approach. Unlike competitors building unified in-house systems, Volvo relied on code from multiple suppliers, complicating debugging and prolonging delays. CEO Jim Rowan acknowledged these missteps, stating that the EX90's technological foundation would support future innovations but admitted 2025 would be a "difficult year" for the industry.

Valuation Risks: Overvaluation Amid Uncertain Prospects

Analyst assessments of Volvo's stock (OM:VOLCAR B) are divided. Some argue the company is overvalued, with shares trading 8–19.9% above their fair value estimate of SEK 17.76. This premium reflects cautious assumptions about future earnings, margins, and the challenges of scaling EV production. High investment costs in electrification, regulatory uncertainty, and delays in achieving sustainable free cash flow are cited as key risks.

Conversely, discounted cash flow (DCF) models suggest the stock is undervalued by up to 28.1%, contingent on successful execution of cost-cutting initiatives and new EV launches like the EX60. However, these optimistic projections hinge on resolving supply chain disruptions, navigating tariffs, and adapting to shifting consumer preferences. The company's long-term operating margin target of over 8% appears ambitious given current headwinds.

The Path Forward: Can Volvo Reclaim Its Edge?

Volvo's future depends on its ability to address three critical areas:
1. Software and Platform Integration: The company is pivoting to a centralized computing system and in-house software stack for future models, including the EX60. Success here could mitigate past inefficiencies.
2. Cost Management: The SEK 18 billion cost-cutting plan has delivered short-term gains, but rising amortization costs from new models like the EX90 and ES90 threaten margins.
3. Market Adaptability: Volvo must balance its commitment to electrification with pragmatic strategies, such as hybrid models tailored for the U.S. market.

While the EX60's 2026 launch offers hope for renewed growth, the company's recent history of delays and impairments raises doubts about its execution capabilities.

Conclusion: A High-Risk, High-Reward Proposition

Volvo's EV transition is a cautionary tale of ambition outpacing execution. While the company's cost-cutting measures and new product pipeline provide some optimism, the risks of overvaluation loom large. Investors must weigh the potential for long-term profitability against the realities of margin pressures, strategic missteps, and a fiercely competitive market. For now, Volvo's stock appears to straddle the line between overvaluation and undervaluation-a precarious position that demands close scrutiny.