Here’s why Tesla is Baird’s top stock-market pick for 2017

Tesla Motors Inc., fresh from its $2.6 billion merger with solar-power provider SolarCity Corp. in November, was named top stock-market pick for 2017 by Baird Equity Research on Friday, with analyst Ben Kallo forecasting that Tesla Energy and Model 3 production will beat expectations.

“We believe TSLA’s

TSLA, -0.46%

energy storage business and growth opportunity is not currently reflected in share prices,” Kallo wrote in a note.

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Baird is of the opinion that battery sales are increasing and should get another boost from a battery-production ramp-up that will coincide with the launch of the Model 3, the all-electric sedan Tesla hopes to start selling late next year for about $35,000.

“We recommend accumulating shares ahead of additional details being released about TSLA’s current battery costs and density metrics, and believe the upcoming Gigafactory tour on January 4 will be a positive catalyst for the stock,” he wrote. Baird is hosting a dinner with Tesla management on Jan. 3 and is slated to tour the Nevada plant the following day.

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Tesla’s Powerwall 2 battery offers a competitive pricing advantage on a per kilowatt basis, and should help Tesla grow its share of home and small-business customers, said Kallo. The Powerwall 2 has twice the energy density of the original stationary battery, he said. Some estimates suggest it has about a 30% price advantage in terms of cost per total warranted kilowatt over its closest competitor, said the note.

The company’s utility-scale battery, the Powerpack, also enjoys a strong competitive position inthat growing storage market, as demonstrated by some recent wins.

In September, Tesla said it has been tapped by California regulators to provide a stationary-battery backup station in southern California, a project the car maker called “the largest lithium-ion battery storage project in the world.”

Tesla said it was selected to provide a utility-scale battery system at the Edison Mira Loma substation east of Los Angeles. The system, once fully charged, will have enough energy to power more than 2,500 households for a day, or charge 1,000 Tesla vehicles, said Tesla.

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Stationary storage is viewed as key to more widespread use of renewable energy. Stationary batteries would keep the lights on when the sun isn’t shining or the wind isn’t blowing sufficiently. They already play a part in stabilizing the power grid and smoothing out peaks in energy demand.

The company’s fourth-quarter delivery number, expected around Jan. 3, might create short-term volatility, but the stock should move higher, said Kallo. The analyst is further expecting Tesla to do a deal some time in the first half that would remove an overhang on the stock.

Tesla shares gave up early gains to close down 0.5% Friday, and are down 11% on the year, while the SP 500

SPX, -0.46%

has gained 9.5%. The Dow Jones Industrial Average

DJIA, -0.29%

 has gained 13.4%.

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