Merrill Lynch downplays Tesla’s battery storage business citing less potential, myriad challenges and intense competition
In the research report published on Tuesday, analysts at Bank of America Merrill Lynch (BofAML) downplayed entry of Tesla Motors Inc. (NASDAQ:TSLA) into the battery storage industry. The sell side firm believes that the potential to succeed in such an industry is limited as there are many consumer and industrial challenges, and it is a very competitive market.
Merrill Lynch Research Analyst, John Lovallo, thinks that the there are limited opportunities for the electric vehicle (EV) maker in the battery storage industry and it will take more time than its EV business to make earnings for the company. Mr. Lovallo also touched upon the performance of Panasonic Corporation ADR (OTCMKTS:PCRFY), the EV maker’s existing battery supplier.
Although, the Japanese electronics company has been in the industry for many years, it hasn’t been much prosperous. As per data at BofAML, the stationary storage division of Panasonic has operating margins of 1-2% only. Thus, Mr. Lovallo believes that there is nothing bullish in stepping into the battery storage industry. Even if Tesla establishes ground footing into the industry it will be less lucrative than its core business operations.
BofAML views the EV maker’s upcoming announcement as a perfect move by the company to shift investors’ mind from its under-performing EV business. Moreover, the research firm believes that Tesla will report a massive operating loss and negative cash flow at its first quarter 2015 (1QFY15) results scheduled for May 6.
Mr. Lovallo said that Tesla requires identifying the current net-metering – the ability for a consumer with a renewable energy source, like solar panels, to directly supply surplus energy back to the grid and counterbalance their electricity bill – at the consumer end.
Tesla will use lithium ion batteries for its battery storage division and as per Mr. Lovallo, those batteries aren’t strong enough to maintain high cycle life – number of full charge or discharge cycles that a battery is able to maintain before its capacity declines below 80% – that is an essential feature of industry storage applications.
Not to forget, Tesla will have to face lithium battery companies that include SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) and LG CHEM 144A ADR (OTCMKTS:LGCEY) , large industrial companies like General Electric Company (NYSE:GE) and Siemens AG (ADR) (OTCMKTS:SIEGY), and home generator companies for instance, Generac Holdings Inc. (NYSE:GNRC). The EV maker will directly or indirectly compete with many companies in different industries like pumped hydroelectric, ultracapacitors compressed air, flywheels, lead acid batteries and flow batteries.
Mr. Lovallo further expressed his bearish sentiments by reiterating stock rating of Underperform on Tesla with price objective of $65.
Unlike Mr. Lovallo, majority of analysts at Wall Street are bullish on Tesla stock. Out of 21 analysts that cover the stock, 11 have rated it as a Buy, seven have rated it as a Hold and three have rated it as a Sell. The 12-month average target price for Tesla is $254.76, which has an upside potential of 10.74%.
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