There’s a ‘great battery race’ ahead says Goldman Sachs. These stocks will win

Published Tue, Nov 30 20213:59 PM EST

The "Great Battery Race" is here as the key piece of the energy transition toward renewable power sources is "ready for prime time," according to Goldman Sachs. While much of the talk around batteries focuses on electric vehicles, the energy storage market is rapidly growing since batteries will enable intermittent sources like wind and solar to power the grid even when the wind isn't blowing or the sun isn't shining. Goldman Sachs said there's a host of ways for investors to gain exposure to the growing industry. "Battery storage is a key piece of the energy transition, and we believe a combination of improving economics, renewables growth and decarbonization policy initiatives across the globe are poised to drive a significant inflection in adoption in the coming decade," the firm wrote Monday in a note to clients. Goldman believes the market will post a compound annual growth rate of 30% over the next decade, expanding to a total addressable market above $200 billion. This translates to a revenue opportunity of $33 billion by 2030, up from $5 billion in 2020. Falling battery prices and improvements in storage economics will drive adoption "on the back of the EV industry scale-up and continued investments in lithium-ion technologies." The firm envisions the blended capital cost of battery storage systems falling by more than half by 2030 thanks to EV buildout driving economies of scale. Ongoing power outages and supportive policies will also fuel on-site energy storage adoption. All told, the firm believes the battery storage market is poised to surpass other established clean tech segments, including the solar inverter market. The firm divided the opportunities into three categories, highlight top stock picks for each section: Incumbent manufacturers Emerging technology plays Downstream technology integrators Incumbent manufacturers The first category is the companies that are already established in the energy storage space and so are highly leveraged to the industry's growth. This includes China-based companies BYD and CATL , both of which are key players in the electric vehicle battery market. The firm holds a buy rating on shares of BYD, noting that the company's energy storage business spans 50 countries. Goldman said that BYD ranked No. 1 in EV sales in China for 2020, and No. 2 in terms of market share for power batteries. Looking ahead, the firm predicts continued strength for BYD in China as well as "strong market expansion outside of China." The firm rates competitor CATL, which is the largest power battery supplier in China, at neutral. Another name that's an "incumbent manufacturer" is Tesla . The company offers its Powerwall storage system for residential customers, its Powerpack for commercial and utility operations, and the Megapack for larger utility-scale energy storage. "We forecast Tesla's storage deployments...will grow at a 30%+ CAGR [compound annual growth rate] through 2023," the firm said. "We believe Tesla's storage business underscores the benefits of a tightly integrated hardware and software approach, which enables Tesla to achieve market-leading energy density and improve its products over time with OTA [over-the-air] updates." The firm has a buy rating on the stock, and a $1,125 12-month target, which is slightly below where shares closed on Monday. Emerging technology plays As the stationary storage market grows, companies that make the technology necessary to connect batteries to the grid, among other things, stand to benefit. The firm pointed to names like Enphase , SolarEdge and Generac . Goldman has a buy rating on both Enphase and SolarEdge, which make inverters for solar systems and also have battery offerings. For Enphase, analyst Brian Lee noted that storage shipments are accelerating and are a "key driver of growth" for the company. Lee estimates that revenue from storage will grow from 7% in 2020 to 26% by 2023. For SolarEdge, the firm said that the company's storage division is set to "benefit from vertical integration." By 2023, the division should account for 20% of SolarEdge's revenue, according to the firm. Goldman rates Generac at neutral. Shares of the backup power company are up more than 80% for 2021. Downstream technology integrators Finally, there are the companies that make specialized software to control these systems, as well as the companies that actually develop renewable energy sites. Two companies focused on the software side of things are Stem and Fluence , the latter of which Goldman just initiated coverage on with a buy rating. Fluence doesn't manufacture the storage systems directly, but it provides integrated systems that help utility-scale companies manage their renewable assets. "Given its leading share position, strong backlog growth and diversifying model which is including more services and software mix on top of what is mostly hardware-oriented revenue today, we see FLNC positioned to be one of the fastest-growing companies in our coverage," the firm wrote in a note to clients while launching coverage on the stock. Goldman has a $52 12-month target on shares of Fluence, which is 53% above Monday's closing price. The firm also has a buy rating on Stem, and pointed to NextEra Energy as another beneficiary within the downstream technology integrators. Analyst Michael Lapides has a neutral rating on the stock. - CNBC's Michael Bloom contributed reporting.

Solar Farm at Death Valley

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The "Great Battery Race" is here as the key piece of the energy transition toward renewable power sources is "ready for prime time," according to Goldman Sachs.