There’s been a slightly embarrassing turnaround concerning the likely value of Aston Martin Lagonda (LSE: AML) shares, as one of the banks that floated it at £19 now says it is aiming for £4.00.
That it thinks the stock will approach 400p and a 79% decline in value in only a year since an IPO is not exactly what we investors are looking for. Nice of Bank of America Merrill Lynch to tell us, of course, but perhaps it could have opined this a little earlier?
From my vantage point this doesn’t come as the greatest of surprises, as I don’t think Aston Martin is large enough to be able to survive as an independent. Even the market segment it is trying to address isn’t large enough. I’m not talking about how well it makes its lovely cars, nor how many of us boy racers lust after one. It’s that the niche it is trying to fill doesn’t produce enough revenue to carry the costs of the business model.
This is an opinion, no doubt about that, but there’s perhaps good reason why the luxury marques aren’t independents. They tend to nestle inside much larger groups – there are exceptions, like Morgan, but the economic model I’m employing explains that.
In order to make those top-end cars, it’s necessary to be, well, making top-end cars. The latest and greatest technology must be included, and to do that it’s necessary to develop that new tech in-house. This is expensive – developing new tech always is.
Sure, it’s always been true that the tech – say, ABS, disc brakes, automatic steering or gearboxes – developed for top-end brands ends up a decade or three later in the mass market. But there’s still this difficulty of paying for that development.
Something developed for a Roller these days will soon enough end up in a 3 Series. Whatever Bentley’s next gizmo is going to be will arrive in a Skoda at some point. But BMW can therefore spread those development costs – amortise to use the jargon – over all Beamer sales, VW the same across its brands. Further, those mass market sales revenues can be used to pay for that top-end marque development.
Which is, I think, the Aston Martin problem. It has to carry the costs of that technological development without having the mass market sales to pay them off in the fullness of time. Nor does it have the mass market revenues to finance those development costs today.
I simply don’t see it as being possible to be a £1 billion company – both in corporate value and turnover, approximately at least – and carry those development costs long term. There is, after all, a reason why the company has gone bust seven times already over the century or so.
Morgan survives because when was the last time it changed anything it does, let alone its technology?
Aston Martin will, I think, have to accept a buyout at some point and become that star brand within a wider company. The costs of trying to go it alone are simply too high.