There may not be a company in the solar industry more confusing and (in my opinion) misunderstood than SunPower Corporation (NASDAQ: SPWR). It's a utility scale solar developer combined with a commercial and residential solar company and an industry leading manufacturer just to make things more complicated.
As a result of this complexity, it's hard to piece together what the company's finances mean, what's on its balance sheet, and where it stands versus competitors. So, let's dig through this complex puzzle piece by piece.
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SunPower's residential solar business is bigger than you think
It doesn't get a lot of attention, but SunPower's solar leasing business is nearly as big as Sunrun (NASDAQ: RUN) and Vivint Solar (NYSE: VSLR), who with Tesla (NASDAQ: TSLA)'s SolarCity make up the three largest residential installers in the country. And with Tesla de-emphasizing solar it could be SunPower in the top three.
If you look at Vivint Solar's enterprise value (market cap plus debt) of $868 million and Sunrun's enterprise value of $1.74 billion it seems like SunPower's residential solar leasing business alone should be worth $400 million to $500 million. But that's only part of SunPower's residential solar business.
On top of this leasing business, SunPower sells about two-thirds of its residential solar systems, logging a total about $600 million in revenue per year. And with gross margins over 20% and projected to rise as lower cost solar modules are released, I think it's safe to say the residential solar business alone should be worth over $1 billion and maybe much more.
Commercial solar is ahead of the competition
SunPower's commercial business may be its least appreciated because it's not very visible to consumers or investors. But it may be where SunPower will see the most growth in the future as it offers a number of flexible, complete solutions to corporate customers under the Helix product lineup. Even energy storage is starting to be a more common offering.
SunPower has about a $2 billion pipeline of Helix complete solutions or over three years of revenue at its current $600 million annual run rate. The current challenge in the business is that commercial sales have traditionally generated gross margins in the low teens or high single digits. According to management, the margin profile should improve, but we haven't seen evidence of that yet.
There aren't really great valuation metrics for the commercial solar business on its own, but a $2 billion backlog and an annual business of $600 million in a booming segment of the market should be valuable. If we put a ballpark valuation of half of backlog, or $1 billion, I think it would be a conservative ballpark for the business's valuation.
Utility scale solar is THE wildcard
Large, utility scale projects have been the real money maker for SunPower over the last five years. But as competition has entered the solar development business it's become harder to make money. On top of that, SunPower's back contact solar panels weren't low cost enough to compete with commodity solar modules from Asia. That's why it invested in a P-Series product that takes commodity solar cells from third parties and assembles it into a module that's slightly more efficient than competitors can make with the same cell. When married with the Oasis power plant platform of sun tracking racking, inverters, and design solutions the company thinks it can compete to offer solutions to developers around the world.
To build out the Oasis/P-Series platform, SunPower has a 400 MW manufacturing plant in Mexico and a joint venture in China that will make 1.2 GW of solar modules in 2018 with plans for as much as 5 GW in capacity within five years. If these products are competitive on the market and production is expanded the utility scale solar business could easily generate over $1.5 billion in revenue next year and more than double in five years. If it isn't competitive it will put pressure on the residential and commercial businesses to pick up the slack.
If P-Series and Oasis start selling well, capacity is increased, and the business generates mid-teen margins, the utility scale solar business could easily be worth the same as First Solar (Nasdaq: FSLR) after pulling out its cash level, or about $3 billion. This may seem crazy, but First Solar will have less than 4 GW of solar capacity when it's done with its latest manufacturing upgrade and SunPower will have more capacity than that and a higher efficiency product. First Solar is hoping to make 18% efficient modules starting next year and SunPower is already making 19% efficient P-Series modules in China. SunPower needs to execute to live up to a $3 billion valuation for the utility scale solar business, but it's possible to get there.
The assets everyone overlooks
On top of the operating assets SunPower as ongoing, it is a co-sponsor of 8point3 Energy Partners (Nasdaq: CAFD) and owns 28.883 million shares of the yieldco's stock. The company is up for sale and it's possible that SunPower will generate around $500 million from the sale, giving it the ability to pay off $300 million in convertible debt due in 2018 with room to spare.
Why SunPower is so hard to understand
You can see that all of these businesses are unique and they're tough to value on their own. On top of that, SunPower's solar module technology requires capital investment and if equipment becomes obsolete quickly -- which has been the case for everyone in solar over the past decade -- it makes it difficult to make money or build a sustainable advantage. With the solar industry reaching a new level of maturity I think we'll see the pace of innovation in solar modules slow, which is good for manufacturers, but it's uncertain if SunPower's technology will pay off in the way management expects.
But using the ballpark valuation numbers above, I think we can conservatively estimate that SunPower's stock has a very good risk/reward profile. With $1.8 billion in debt, including $650 million that's non-recourse asset backed debt, and a $1.25 billion market cap, SunPower's enterprise value is only $3.05 billion.
The value of 8point3 Energy Partners and the residential solar assets already on the books should be worth around $1 billion, meaning SunPower's ongoing operations are only being valued currently at about $2.0 billion. Above, I've outlined why I think the value of operations should easily be $4.5 billion and there's upside from there if next generation solar modules drive growth in any segment of the market. If we use the $5.5 billion enterprise value calculation, that would equate to a market cap of $3.7 billion, or a stock price of $26.54 per share.
The bottom line is that there's a lot to like about SunPower's business and I think the stock has a strong risk/reward profile. But there are significant risks ahead. Management needs to show it can grow and make money consistently in residential and commercial solar, which will be its core markets, and leverage new partnerships to make P-Series and Oasis successful products in utility scale solar. If they can do that this stock should be worth many times what it is today. For now, the confusion of this business is enough to keep a lot of investors out of the stock.
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