SolarCity Acquisition Could Add Cross-Sell Opportunities For Tesla

Tesla Motors Inc TSLA investors clearly aren't happy with the plan to merge with SolarCity Corp SCTY. While SolarCity shares are up 8.6 percent Wednesday, Tesla shares are down 7.8 percent.

Despite the negative market reaction, Baird analyst Ben Kallo believes the merger will provide opportunities for Tesla.

“TSLA believes it can benefit from SCTY’s sales and distribution networks, and we believe the transaction would add cross-selling opportunities for Tesla Energy products and TSLA’s vehicles for SCTY’s large customer base,” Kallo explains.

Related Link: UBS Still Says Sell Tesla, Hold SolarCity

While Baird continues to see significant upside for Tesla’s stock in the long-term, Kallo admits the stock will face near-term headwinds related to the merger.

Kallo believes Tesla’s Powerwall products are a good complement to SolarCity’s rooftop solar installations and that SolarCity’s customers are likely candidates for buying Tesla vehicles.

Kallo predicts Tesla investors will be concerned about CEO Elon Musk’s ties to both companies, but Musk and Antonio Gracias reportedly abstained from voting on the merger proposal.

He notes that determining values for both companies remains difficult at this point.

Baird maintains its Outperform rating and $338 price target for Tesla. The firm’s price target is based on a 31x PE multiple on the firm’s 2020 EPS estimates.

Disclosure: the author holds no position in the stocks mentioned.