Top 3 European Auto Stocks, According To Goldman Sachs

Goldman Sachs initiated coverage with Buy ratings on BMW, Mercedes‑Benz and Ferrari, preferring luxury automakers for stronger cash positions, lower complexity and upcoming EV offerings. BMW is highlighted for its Neue Klasse EV platform, large net industrial cash balance, declining capex after 2024 and expects flat China sales in 2026 with growth from new EVs in 2027; Mercedes is expected to cut battery costs per kWh by ~30% with next‑gen architectures, forecast ~4% volume growth in 2026 but reported a 12% drop in Q3 car/van sales to 525,300 units; Ferrari’s Q3 2025 revenue missed estimates at $1.77bn, but Goldman expects Special Series models in 2026–27 to drive margin and EPS upside. The calls underscore potential upside for luxury EV leaders while flagging China competition, U.S. tariffs and the importance of local battery supply chains.

Analysis

Market structure: Luxury OEMs (BMW - BMW.DE, Mercedes-Benz - MBGYY, Ferrari - RACE) are the primary beneficiaries — stronger net cash, faster EV platform rollouts and pricing power should allow 20–35% higher EBIT margins vs mass-market peers over 2025–27 if GS thesis holds. Mass-market OEMs and low‑cost Chinese entrants face pressure on mix and margins; faster battery-cost deflation (~30%/kWh targeted by new architectures) shifts demand away from high-nickel chemistries and toward lithium/higher‑energy cells, altering commodity winners and losers. Cross-assets: improved cashflows should tighten corporate credit spreads ~20–50bps for German luxury names, weigh modestly on nickel/cobalt, lift lithium prices, and create EUR idiosyncratic strength versus CNY if Chinese competition intensifies.

Risk assessment: Tail risks include a >10% China demand shock, accelerated US/EU tariffs, or a failed Neue Klasse launch — any would compress multiples by 15–30% quickly. Timeframes: immediate (days) = analyst re-ratings/flow; short (3–6 months) = product teasers, quarterly results; long (12–36 months) = platform scale, capex normalization and buyback effects. Hidden dependencies: cell supply agreements, residual-value dynamics that drive leasing P&L, and local battery content rules; catalysts include EU/US trade rulings, BMW/Mercedes product launch dates and 2025 capex guidance updates.

Trade implications: Primary tactical trades are long BMW.DE and MBGYY with 12–18 month horizons and funded hedges: buy 2026–27 LEAP call spreads 10–20% OTM to control premium, and buy 3–6 month protective puts 5–10% OTM sized to 20–30% of position. Pair trades: long BMW.DE vs short Stellantis (STLA) or VWAGY to isolate luxury vs mass-market execution; target reversion of 200–400bps margin gap over 6–12 months. Rotate portfolio weight from broad auto ETFs into premium OEMs and premium battery suppliers; size positions so total auto exposure remains <8% of equity risk budget.

Contrarian angles: Consensus underestimates residual‑value risk from hybrids and Chinese entry — residuals falling 5–10% would hit OEM lease financing lines and drive earnings volatility. Conversely, market may underprice the margin leverage from platform simplification (capex peak 2025 then decline) — Mercedes could rerate on 2026 free‑cash‑flow beat. Historical parallel: Mercedes’ structural transitions (diesel to petrol hybrids) took 12–24 months to materialize into valuation; expect similar lags here. Unintended consequence: rapid platform consolidation could compress supplier margins and create single‑point cell‑supply risks that spike volatility during 2025–26.

Key Decisions for Investors

• Establish a 2–3% long position in BMW (BMW.DE) and a 1.5–2% long in Mercedes-Benz (MBGYY) split-sized across both, horizon 12–18 months, target combined upside 25–35%; set a tactical stop at -12% and trim half at +25% profit.
• Initiate a 1% event-driven long in Ferrari (RACE) via Jan‑2027 call spread ~10–15% OTM (buy nearer‑ATM, sell one higher strike) to limit premium; thesis: Special Series 2026–27 should reaccelerate margins — hold to product cadence or until +30% realized.
• Execute a relative-value pair: long BMW.DE (1.5%) vs short Stellantis (STLA) or VWAGY (1.5%) for 6–12 months to capture luxury/mix outperformance; close if spread tightens <100bps or either leg moves >20% intraday.
• Buy protective puts sized to 20–30% of BMW/MBGYY positions (3–6 month, 5–10% OTM) to hedge China/tariff downside, and use sell-to-open covered calls on 30–50% of position after a 20% rally to monetize range-bound risk.
• Reduce exposure to broad auto ETFs or mass-market OEMs by ~50% of current auto allocation within 30 days and redeploy proceeds into premium OEMs and premium battery/pack suppliers (target names with secured cell contracts), keeping total auto+supplier exposure ≤8% of equity risk budget.