Apple’s AirPods Are Everywhere. So Why Is This Stock in the Dumps?
Sometimes, even one of the hottest products on Earth can’t lift a stock.
German battery maker Varta VAR1 0.00% (ticker: VAR1.Germany) is widely believed to provide the lithium-ion micro-batteries that power Apple AAPL +1.15% AirPods, the most popular wireless earphone. But Varta’s stock has been cut in half over the past year, and it could well fall further. The main culprit: rising costs of raw materials and energy for its plants.
Stephan Bonhage, an analyst at Germany’s Metzler Capital Markets, has rated the stock a Sell, forecasting that the price will fall 19% to 64 euros ($64.53). “Overall,” he writes, the valuation of the shares is “in our view demanding, trading at a multiple of 27.5 times the expected earnings for 2023 against the background of clouding growth prospects, declining margins, and stiffening competition.”
Varta’s major claim to fame is the AirPod. Varta won’t talk about its customers, but Metzler and others have identified Varta as the maker of tiny batteries inside the device. Apple sold some 72 million sets of AirPods last year, according to TFI Asset Management. Apple didn’t respond to requests for comment about Varta.
In all, such “hearables’’ saw sales roughly quintuple from 2018 through 2020, accounting for about a third of Varta’s revenues. Varta makes a variety of other batteries for consumer, automotive, and industrial markets. But much of it looks to be coming under pressure.
The cost-of-living surge is denting consumer demand, and semiconductor shortages, combined with lockdowns in China, have caused business customers to curb production of electrical goods, some analysts say.
While Varta doesn’t disclose a sales breakdown of its divisions, analysts have made estimates. The core business, which makes household batteries, accounts for 38% of 2020 revenue, according to Bonhage. But there’s not much growth: Its mature and highly competitive market grows 1% to 2% annually.
Another 18% or so of revenue comes from providing batteries for hearing aids. But that market is shifting towards rechargeable power cells, so repeat business for nonchargeable batteries is declining.
Faster growing is its battery pack business, which makes rechargeable units for manufacturers of vacuum cleaners and other household items. But this generates just 5.5% sales, says Bonhage.
The company, based in Ellwangen, Germany, between Munich and Stuttgart, dates to 18887 and has a market value of €3.1 billion. Varta posted adjusted earnings before interest, tax, depreciation, and amortization, or Ebitda, of €282 million in 2021, a 17.4% increase on 2020, while sales grew 3.8% to €902.9 million.
It has forecast adjusted Ebitda between €260 million and €280 million for 2022—essentially flat. That’s based on sales between €950 million and €1 billion—up 10% or so, at best.
CEO Herbert Schein told Barron’s, “Varta’s strength is our power to innovate. We will continue our very successful growth strategy, which we have implemented in all of our business units. However, lithium-ion technology has the greatest potential, and this business is set to be the biggest driver of Varta’s future growth.”
While Barenberg analyst Charlotte Friedrichs thinks 2022 guidance is feasible, she says it requires Varta to perform strongly in the second half, achieving 15% to 20% year-on-year increases in Ebitda and sales. “We believe this is challenging, but possible in the absence of lockdowns in Asia or a material weakening in consumer demand,” she wrote. In other words, the economy might need a recharge for Varta to hit its numbers.