Mercedes‑Benz Group AG has lived through wars, oil crises, and diesel scandals, yet 2025 may be the oddest test so far. In early July the company disclosed that global deliveries fell 9 % in Q2 after it throttled exports to the United States and China when a fresh round of import levies kicked in. Battery‑only models fared worse, sliding 18 %, while North America and China each dropped double digits. The share price, which had out‑paced the DAX through March, has since surrendered about a quarter of its gains. Investors now wonder whether the luxury titan is drifting toward a value trap or giving patient buyers a rare shot at quality on the cheap.
My own take is that the volatility masks more upside than downside for a 3‑year horizon. Mercedes still commands the most valuable auto brand in the world, and the order book for its revamped line‑up—anchored by the new CLA sedan and a redesigned GLC SUV—remains healthy. Tariffs and a temporary drop in Chinese demand have impacted results, but they haven’t wiped out the group’s core strengths: a high-margin luxury mix, ample cash, and a measured EV strategy focused on profits. The stock at less than 6x earnings and an 8 % cash yield looks too depressed relative to those assets.
Tariffs, Supply Chains, and the Next Sales Wave
No modern automaker can ignore geopolitics, and for Mercedes the tariff fight is the loudest macro swing factor. Management acknowledged in its Q1 report that if all announced tariffs stay in force, full‑year EBIT and free cash flow will land “materially lower” than guidance. That warning turned real a quarter later: U.S. deliveries fell 14 % and Chinese volume 19 % as the firm slowed shipments to avoid margin‑sapping discounting. The near‑term pain is evident, but history says trade tensions rarely cripple luxury demand forever. Once customs rates stabilize, postponed purchases often return, especially for established brands.
Equally urgent is raw‑material risk. China’s sudden decision this spring to tighten rare‑earth export licenses spooked European automakers who rely on neodymium magnets for electric motors. While production lines keep running, Mercedes has already told suppliers to carry buffer stocks and is evaluating magnet‑free motor designs for later platforms. Those moves cost money, yet they also harden the supply chain against future shocks and highlight the benefit of Mercedes’ €33 billion net cash position.
A Nuanced Battle for EV Relevance
Mercedes was first among legacy peers to declare it “all‑electric by 2030 where market conditions allow,” but customers have not stampeded into its early EQ models. In Q1, fully electric sales dropped 24 % even as global BEV adoption set records. Rather than chase share through price cuts, leadership pivoted: new products will be “electric‑first,” yet engineered to accept efficient hybrids or low‑emission gasoline engines. The Concept CLA preview, built on the MMA architecture, illustrates the plan—an 800‑V electric sedan promising sub‑14 kWh per 100 km efficiency, yet able to host a compact plug‑in drivetrain for buyers who still crave a gas safety net.
The other front is software. Tesla still sets the bar for over‑the‑air upgrades, but Mercedes is catching up with MB.OS, its in‑house operating system due in showrooms next year. The stack folds entertainment, telematics, and Level 3 Drive Pilot into one architecture and will allow paid feature unlocks after delivery. That subscription upside is ignored in most valuation models yet could add 100 basis points of margin by the back half of the decade. The first live test will take place when CLA customers have to decide whether they want to pay extra for hands-free driving on the highway. Initial online reactions have been positive, but pricing will only truly matter once the sedan is on the market.
Competition remains brutal. BMW’s Neue Klasse EVs launch in late 2025, and Volkswagen’s Audi brand uses the PPE platform to extend battery range. American investors also see Lucid creeping into luxury corridors, while BYD and NIO undercut German names in China. Mercedes’ advantage lies in its brand image: Maybach, AMG and G-Class together accounted for 15% of the vehicle mix in the first quarter, reporting double-digit growth even as total volume declined. Those sub‑labels insulate pricing and draw clients less sensitive to interest‑rate fluctuations than mainstream buyers.
Reading the Financial Results
Quarterly numbers confirm that the move to up‑market is working, even in a weaker macro environment. Q1 revenue fell 7 % to €33.2 billion and EBIT retreated 41 % to €2.29 billion, yet free cash flow rose to €2.4 billion, lifting net industrial liquidity to €33.3 billion. The car division posted a 7.3 % adjusted margin, respectable given lower mix and forex fluctuations. Vans delivered 11.6 %, while the finance arm held ROE at 8.6 % despite higher funding costs. Credit losses ticked up to 0.43 % but remain well below the long‑term average.
Balance sheet strength is the underrated story. Mercedes finished Q1 with net industrial cash equal to roughly two‑thirds of its market capitalization. Upcoming automotive bond maturities through 2027 total just €11.6 billion. Rising interest rates from the Fed and ECB are pushing up funding costs for new loans to individuals, but captive lease prices are adjusting quickly, and the financial subsidiary maintains a pool of asset-backed credit facilities that match longer-term bonds. That design lets the parent push R&D spending—about €13 billion this year—without dipping into external debt.
Management is currently only providing targeted expectations, but language around the H2 order book is positive. Bookings for the new E-Class have doubled following its European launch. Domestic demand looks resilient: German Q2 retail sales climbed 7 % year on year even as wholesales contracted, implying dealers are clearing units. China remains the swing region; any stimulus that revives premium spending could restore volume faster than consensus models assume.
Dividends, Buybacks, and Market Multiple
Income investors seldom see an 8 % yield backed by a fortress balance sheet, yet that is what Mercedes offers after trimming its payout to €4.30 per share this spring. The dividend consumed roughly €4 billion against free cash flow above €9 billion last year, leaving ample room for the ongoing €5 billion buyback. At 6x times earnings, each euro spent on repurchases retires more than 3 % of shares outstanding and immediately boosts earnings per share.
Relative valuation looks equally lopsided. BMW trades near 7x, Porsche AG sits around 12x, and Ferrari stretches to 40x. Even the broader Euro Stoxx Autos index commands about 8x. Mercedes, despite richer mix and heavier cash, languishes below 6x. Strip out net cash and the enterprise value equals barely 1.3x last year’s EBIT, a level usually reserved for state‑owned or structurally unprofitable firms—neither label fits Stuttgart’s proudest export. A modest re‑rating to 8x, still beneath Porsche’s, would lift the share around 30 % before considering EPS growth.
Sceptics say the multiple fairly discounts future EV margin erosion, yet that view ignores two levers: first, Mercedes’ steady pivot to higher‑priced models that often carry double‑digit returns; second, the coming software subscriptions, whose incremental revenue arrives at close to 60 % gross margin. Put differently, even if hardware margins fall by two points during the EV ramp, digital services can fill much of the gap.
What Could Go Wrong
Though the upside appears asymmetrical, three hazards are worth monitoring. A full‑blown tariff war could linger longer than management’s current planning window, draining €500 million or more from annual EBIT unless U.S. local output ramps sooner. An outright recession would shrink luxury demand, though the clientele that buys Maybachs tends to retrench less than the broader market. Finally, execution risk looms: if the MMA platform misses its cost or range targets, Mercedes could slip further behind Tesla and BMW in the volume BEV stakes. Early, objective road tests next spring will be telling.
Conclusion
Tariffs and a choppy Chinese economy have thrown fresh doubt on Mercedes‑Benz at a time when the market already discounts legacy automakers. Yet the numbers reveal a company still earning respectable margins, flooding cash into the bank, and selling every high‑end car it can build. The redesigned product range, hybrid‑inclusive architecture, and internally developed software stack give the group a roadmap to stay relevant in an electric future without compromising profitability.
At less than 6x earnings, with net cash equal to half its market cap and an 8 % dividend that is well covered, Mercedes offers a reward profile seldom available in blue‑chip European equities. I rate the stock Buy for investors able to ride near‑term volatility. If tariffs ease or Chinese demand revives, the share can rerate quickly; if macro headwinds last, the ample cash buffer and rich yield pay investors to wait. Either path looks attractive over a 3‑year horizon.