SunPower Corporation (NASDAQ: SPWR) is one of the strangest companies to follow in the solar industry today. It makes the world's most efficient solar panels and should have a built-in advantage in the space-constrained residential and commercial solar markets as a result. But rapidly falling costs of Chinese solar panels have undermined a lot of its advantage in those markets, and the company is scrambling to lower costs to better compete.
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In the power plant business, SunPower bet on high-efficiency panels known as E-Series, which have become too costly to compete in today's market. As a result, it's now building out a new product called P-Series that leverages commodity cells to make solar panels that are slightly more efficient than competitors, hoping that pairing those panels with power plant design and engineering services will be a path to the future.
For investors, the struggle comes in how to value SunPower. If the company's strategies to lower costs in residential and commercial solar don't pan out, and the power plant business doesn't gain traction as hoped, the company could be in real financial trouble. However, given a string of solar bankruptcies in the last few months, it's one of only a handful of survivors, and if SunPower gets its strategy right, it could gain market share and be highly profitable in the future. Here's what the scenarios might look like by 2020.
Residential roof with SunPower X-Series solar panels. Image source: SunPower.
What SunPower is today
I'll start with the baseline of what SunPower is right now. In the last year, it has deployed1.29 GW of solar around the world with different levels of sales per watt and gross margins, which you can see below.
|MW (ttm)||286 MW||304 MW||703 MW|
|Revenue per watt (mrq)||$2.17||$2.03||$1.58|
|Gross margin (mrq)||15.3%||3.6%||1.5%|
Data source: SunPower earnings data sheet.
There's no way SunPower can be profitable with these margin levels, and given the weak financial results, management has lowered operating costs, hoping to keep them at a run rate of about $350 million per year. It's this bar that SunPower needs to get over, generating gross margin above that level to get back to operating profits. Here's what that could look like in the future.
Carports are a big part of SunPower's commercial solar business. Image source: SunPower.
The SunPower of 2020
When projecting SunPower in 2020, we have to make a few assumptions about the recovery of the solar business in general and SunPower's cost structure, which is currently suffering from some pressures that should dissipate over time. I'll lay out the assumptions I'm making below.
As SunPower lowers the cost of panels (new X-Series capacity expected to lower costs) and components in residential Equinox and commercial Helix systems, the margins in both businesses should come up to closer to the 20% margins generated historically. Although, the price of each watt of sales may come down slightly.
On the utility side, SunPower is seeing some traction in the component sales of the Oasis platform and P-Series solar panels, which is expected to be almost the entire business by the end of 2017. But projecting that business into 2020 is difficult. Again, assumptions need to be made to build a projection.
The first analysis is assuming that residential and commercial volume grows to 500 MW each -- reasonable given steady market share gains recently, and revenue of $2.00 per watt for residential and $1.50 per watt for commercial systems, with 20% and 15% gross margins, respectively. On the power plant side, I projected 2.0 GW of sales at $0.75 per watt, much lower than current sales levels, but appropriate given the new component sales model, and just a 10% gross margin.
|MW (ttm)||500 MW||500 MW||2.0 GW|
|Revenue per watt||$2.00||$1.50||$0.75|
|Gross margin (%)||20%||15%||10%|
|Gross margin||$200 million||$112.5 million||$150 million|
Data source: Author's calculations.
Under this model, which I think is the low end of SunPower's potential, the company would generate just $112.5 million in operating profit if it can hold operating costs at $350 million annually. That may lead to a small amount of net income, but it isn't enough to project a big increase in the stock.
If SunPower is more successful, if the Chinese partnerships it has created indeed produce 5 GW of P-Series solar panels, and if the Mexicali plant grows to 1 GW, the business could look very different. In the model below, I also assumed slightly more growth in residential and commercial sales and higher margins across the board.
|MW (ttm)||600 MW||600 MW||6.0 GW|
|Gross margin (%)||25%||20%||15%|
|Gross margin||$300 million||$180 million||$675 million|
Data source:Author's calculations.
This is probably a best-case scenario for SunPower by 2020, but if these projections are correct, you can see a path to $1.155 billion in gross margin and $805 million in operating profit. That should give investors a lot of upside for a company currently trading with a $990 million market cap.
Where will SunPower be in 2020?
The tables above provide a broad outline of what SunPower's financials might look like in 2020, depending on how the company's strategy plays out. Conditions could be worse -- or better -- than I've outlined, but investors should keep in mind what the risk is and what it will take for this company to pay off big for investors.
Management has said that a new, lower-cost X-Series panel is on the way, and if that's true, we could see SunPower perform at or better than what I've projected above. And at the very least, I think the residential and commercial businesses are at the least risk of being uncompetitive three years from now.
The power plant business is the wild card. If Oasis and P-Series aren't competitive, it could put the company in a rough financial position, where it's relying on residential and commercial sales. In that case, I could see the stock going nowhere and majority owner Total having to continually bail out the company, as it has done over the past year.
Or, SunPower could become one of the largest power plant suppliers globally with the product. If it can generate $805 million in operating profits with a path for growth ahead, this could easily be a much more valuable company. SunPower's equity from unconsolidated subsidiaries and financing costs have essentially offset the last few quarters, so if we assume operating profit and net income will be similar and put a 15 P/E multiple on the stock the company would be worth over $12 billion based on the best case assumptions above.A lot has to go right to get to a 12 times return from here, but you can see that the upside is clearly there if SunPower's strategy is right.
Watch power plant announcements closely because, as you can see above, that's the side of the business that could make or break SunPower by 2020.
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