SPWR // So many roofs, so few solar installations … yet

SunPower // SPWR // Green 7 // Strike Price = {subscribe}

• 10 year CAGR = 5.9% (historical stock results Apr 24, 2013 to Apr 24, 2023)
• 5 year CAGR = 19.4% (historical stock results Apr 24, 2018 to Apr 24, 2023)
• Future Growth Rate Estimate: {subscribe} (based on our analysis of past financial results, qualitative research, and analyst estimates of future revenue and earnings)
• 5 year Price Target = {subscribe} at a Price to Revenue multiple of 2 (current industrial sector median is 1.28 and SPWR is 1.4 with a 5 year avg. of 1.74)
• Price to Free Cash Flow / Share = -10.5 😢
• Return on Invested Capital = 7.8% 🤔
• Long Term Debt to Total Assets = 0.02% 😀
• Cash & Equivalents to Total Operating Expense = 140% 😀

// TL;DR

Secular tailwinds par excellence for the industry, and a solid future growth rate well above the indexes, but SunPower has suffered growing pains. The debt is minimal and the cash on hand is decent. SunPower has potential to be THE brand in the residential solar installation space and capture and maintain leading margins as the industry is commoditized. A brand moat is not guaranteed so position size accordingly and Abide the Strike Price.

// WHY BUY

SunPower is a provider of residential solar panel and storage systems.

Company bio: “a solar technology and energy services provider, offers solar, storage, and home energy solutions primarily in the United States and Canada. Its solutions include the Equinox and SunVault systems which are pre-engineered modular solutions for residential applications that combine solar module technology with integrated plug-and-play power stations, cable management systems, and mounting hardware that enable dealers and installers to complete system installations, as well as for end customers to manage their energy production. The company also provides post-installation monitoring and maintenance services. It serves residential customers, including individual homeowners and new home builders.”

Secular tailwind for the industry as the economics of renewable energy becomes better than the fossil fuel+nuke alternatives. Solar also suits the independent spirit of many people. If you live in a relatively sunny locale and can quietly and cleanly generate your own electricity for a reasonable installation cost, what better thing can you use the roof of your house for?

A 400 W solar panel costs about US$250 and generates about 2 kWh per day. 15 panels takes up about 225 square feet of roof space. The average home requires 30 kWh per day. For US $3750 in panels plus installation costs a home can be generating most of its electricity needs. If we presume energy needs will rise, doubling generation potential and adding a battery makes sense, as does tacking that cost onto the overall cost of the house and the resulting mortgage.

In Canada if the installation costs $40,000 with a battery and the average house costs $600,000 then that adds about 6.7% to the cost. That seems well worth it for potentially free energy for a couple decades.

In 2020 SunPower spun-off the solar PV manufacturing part of their business. Maxeon (MAXN) … analysis forthcoming. They also sold off the Commercial and Industrial Solutions part of the business to their major shareholder, TotalEnergies (TTE), a French natural gas company interested in renewable energy. This enables SunPower to focus on their strength, residential solar installations and building their digital products and customer experience.

There TAM (in as quick a search as possible):

• As of 2012, the U.S. Census Bureau estimated there were about 115 million residential buildings in the country and 5.6 million commercial buildings.
• As of the end of 2020, there were about 2.7 million residential solar systems in the country and according to the National Renewable Energy Laboratory that had been increasing 32% a year.

By the end of 2023 there will be about 6.2 million [2.7 x 32% x 32% x 32% = 6.2] existing residential buildings with solar installations. If 100 million of the residential buildings can accommodate solar installations, that means the US has about 6.5% coverage so far.

Depending on how you want to slice-n-dice things, there are a lot of possible forthcoming solar installations, many of which are going to be performed by SunPower. And who says they are limited to just the US, which only has about 4.25% of the global population. (They also operate in Canada.)

If installations continue at that 32% pace, it would take about 10 years to cover all the addressable roofs in the US with solar panels. That pace isn’t sustainable but SunPower adding about 20% to its customer base is definitely feasible given the number of installations forthcoming and the current market share of only 2.7%

According to RenewableEnergyWorld.com, the Top 10 residential solar companies in the US, by market share, are:

1. Sunrun – 13%
2. Titan Solar – 4.8%
3. Freedom Forever – 3.9%
4. Tesla – 3.7%
5. SunPower (includes Blue Raven acquisition) – 2.7%
6. Momentum Solar – 2.2%
7. Trinity Solar Power – 2%
8. Palmetto Solar -1%
9. Bright Planet Solar – 0.9%
10. Freedom Solar Power (share not provided by Wood Mackenzie)

According to their chart, as of 2021, Freedom Forever is growing, as is SunPower, with Tesla especially, and Sunrun losing market share.

For what it’s worth for branding, SunPower has the best name of the bunch, for a solar installation provider. Freedom Forever feels like it has political overtones; not that freedom from utility bills doesn’t sound enticing!!

// ChatGPT: WHY BUY

SunPower is a company that specializes in the design, manufacture, and sale of solar panels and related products. The company has a strong reputation in the industry and has been recognized for its high-efficiency solar panels.

// CONCLUSION

Over the years, SunPower’s numbers are all over the map.

You may want to properly understand things like how in 2018 their Gross Profit looks great yet the bottom lines are terrible and vice versa in 2019 and how the Operating Income in Jan 2023 was negative and yet bottom lines were fine. Are these one-time expenses or events, cyclicality, mismanagement or necessary growing pains that will lead to future free cash flows?

In 2021 they acquired Blue Raven for $165M which likely explains the Jan 2022 bottom line losses.

Yes they have secular tailwinds and are a top brand in the residential solar installation industry but is the moat, or path to moatness clear enough to invest in this company despite a very solid future growth rate and 5 year price target?

Installation of solar panels and the accompanying energy management system can be daunting for many people and require a lot of research. Installers that can provide a one-stop solution to reduce complexity and become trusted household (or at least house builder) names will have an advantage with new customers and thus margins.

TBH, we haven’t done enough research to properly understand the above numbers but there is definitely a case to be made for investing in this company at the right price. E.G. 48% increase in customers over the past year. If a semblance of that pace can continue along with improving margins then you’re onto something: “The expansion of gross margin was driven by the continued pass-along of higher input costs to customers with greater pricing power exerted by SunPower on the back of rising demand.” (Pacifica Yield, Seeking Alpha)

// CATALYSTS

Q4 2022, SunPower added 24,000 new customers for a total of 83,100 at the end of 2022. 56,100 was the 2021 total. 48% increase YoY. Guidance for total new customers in 2023 is 90-110K. 83,100 to 100,000 would be a 20% increase in customers.

Other catalysts include batteries, BEV charging and Virtual Power Plant developments. The more EVs that are sold, the more people will want home charging stations, the more they will want solar panels to supply their cars with energy especially as these are products that can be rolled into their mortgages.

// RISKS

Competition, large and small; creating race to the lowest priced provider and thus lack of margins. Lack of brand moat to withstand the competition.

Utilities want all the solar installations for themselves not on residences so they can build transmission lines and not have their energy supply compete with every homeowner with solar panels. They have lobby power.

// NEWS & COMMENTS

Feb 21, 2023

SA // hold: Growth Surges

“I’ve previously been neutral on taking a position in SunPower on the back of continued losses and what was then too high a valuation to pay. However, the company is increasingly putting forward a comprehensive long-term investment case built on the sustained uptake of home solar across the US. …Critically, SunPower has moved to the profitability part of its longer-term story as demand for home solar continues to ramp up.”

// GGI 💬

The growing pains appear to be leading to better margin days ahead?

Jan 5, 2023

SA // hold: Don’t Buy The Hype, It’s Still Overvalued

“The challenge that comes with rapid expansion and more capital deployed is getting a good return on that. With this recent report I got a lot of confidence SunPower is on the right track to regain their margins and hopefully keep them as well.

I think that SunPower will see increased demand for many years to come for their product. But I also believe that they will have a much tougher time securing capital to fund a lot of their expansion. With cheap money no longer being a thing SunPower will need to run a tight ship where they care about keeping positive cash flows and investors happy.

Cash flows are currently positive, which should help mitigate the risks of share dilution.

SunPower is trading at a very rich valuation right now and I think it’s too risky buying it without losing money. I like the company and what they are doing. I think they are in a great spot financially and they continue to grow year after year. But sometimes the performance does not match the share price.”

// GGI 💬

He likes the company but his valuation model appears to give a 2026 price target equal to about where the stock is at today. We prefer our valuation model, but do Abide the Strike Price. This company is not yet a FCF juggernaut that will be rewarded in all macro economic climes.

Mar 31, 2022

SA // buy: Is SunPower A Good Stock To Buy?

“Here I give my view as to why investment in residential rooftop solar PV in the US via SunPower makes sense to me. I’m strongly influenced by what has happened in Australia. New developments at SunPower involve broadening the product offering to include management of power produced from their residential solar PV installations. This includes batteries and soon integrating a Battery Electric Vehicle to the residential system. The SunPower story is getting more compelling.

In 2022 Australian rooftop solar PV is found on three million homes, providing 16 GW of capacity, and being found on almost 1 in 3 homes. It isn’t an exaggeration that by 2030 most Australian homes will have solar PV and at times residential solar PV will provide more than 100% of Australian electricity needs.

Given rooftop solar PV produced ~1% of US power in 2021, there is a long way for rooftop solar PV to grow in comparison with the current (rapidly rising) Australian rooftop experience. This statistic alone provides a core reason to pay attention to SunPower, because it has focused its business on this aspect of solar PV.

California is getting serious about being more aggressive toward renewable energy targets, and so is the rest of the US.

A significant claim by SunPower is that it is the only US Distributed Energy Generation, Storage and Services provider which provides a one-stop-shop that is designed, can be financed, and is warranted by a single company.”

// GGI 💬

This author has done a lot of homework on renewables etc over the years and has a good understanding of how all the pieces fit together. Valuation may not be his strong suit given the stock is down 40% in the past year since he gave it a buy rating. To be fair, the macro economy has not been kind to any pre-FCF generating business lately. The stock is now cheaper but the company is now better as more wrinkles have been ironed out.