SunPower (NASDAQ: SPWR) reported fourth quarter earnings and despite crushing the expectations it set as well as those of Wall Street, the stock hasn't had much of a reaction at all.
After the company's report, I had the chance to talk with CEO Tom Werner about the company's results and the strategy going forward. Below are the highlights of the most important questions I asked.
Will SunPower vertically integrate to compete with SolarCity and Sunrun?
After the recent news that financier Sunrun was acquiring REC Solar, the fourth-largest residential solar installer in the U.S., I was curious to know if SunPower was looking to follow suit and integrate into downstream residential solar. On the utility and commercial side of the business, SunPower is already fully vertically integrated so it might make sense to do so considering the success SolarCity (NASDAQ: SCTY) has had with the model. But that's not exactly what SunPower will be doing, at least not yet.
Werner said his company would still primarily lean on dealers to do installation, choosing not to "own the trucks" or do most of the sales process. But he did say that SunPower was looking to do more marketing and double or triple leads to dealers this year. In some cases, it may even own the entire value chain, including the trucks. Werner compared the model to McDonald's, which franchises most of its stores, owns some, but does control the marketing and branding of the entire company.
As SunPower adds services like energy storage and home monitoring, it will be important to have more control of the services behind the scenes, including billing and monitoring. I would look for SunPower to do more in residential solar without doing the actual installation themselves.
Is SunPower going to push leases with $220 million in new equity financing?
SolarCity has predicated much of its success in solar on growing solar leasing. This has worked well because during a sales call, it's easy to understand the benefits of solar when offered at $0 down and a lower electricity bill. SunPower, on the other hand, sold 70% of its residential installations in cash sales last quarter because it ran out of lease financing.
From SunPower's perspective, the lease is important, but it's used a more balanced approach between leases, loans, and cash sales in the residential business. This has limited lease growth recently because the company ran short on equity financing but the thought is that long term a balanced approach will be the winning formula. What Werner is looking at is policy risks that make a balanced approach safer for SunPower.
Leases are currently dependent on net metering and incentives from local to the national government, which may change in the future. If, for example, net metering rules change in Arizona and California, it could crush the residential lease industry there in a heartbeat.
It's also SunPower's view that a balanced approach using dealers is more scalable globally. Leases and loans are being expanded into Europe and Australia and it would be easier for SunPower to expand into other countries than SolarCity's model of "owning the trucks."
Whether SunPower or SolarCity has the better strategy for the residential solar market long term remains to be answered. There's definitely space for both companies, but it'll take time to determine which generates more growth and more long-term value for shareholders. For now, SunPower continues to see a balance between lease, loans, and cash sales as the best model for them.
A note of perspective on residential solar: The residential solar business has gotten a lot of publicity recently, and I think some perspective is needed when comparing SunPower and SolarCity. On the conference call, Werner pointed out on the conference call that SunPower installed 44 MW of residential solar in North America last quarter, which would likely make it the second-largest residential solar installer in the country, behind SolarCity. But if we look at residential solar globally, SunPower installed 53 MW of residential solar in Asia-Pacific and 31 MW in Europe for a total of 128 MW globally. On that basis, it's the biggest residential solar installer in the world, ahead of the 101 MW SolarCity expected to install in Q4 (which includes commercial and utility scale as well). The two companies have different models but they're both powerhouses in residential solar.
What time frame should we expect a huge capacity expansion?
For two quarters now, I've asked for details on when we can expect a large-scale (1 GW or more) capacity expansion. The 350 MW expansion announced during the Q3 conference call is great, but doubling or tripling capacity is when SunPower changes the game in solar.
Werner can't give details on when a large-scale expansion will take place, but based on the conference call and our conversation, I think we'll get an announcement before 2014 is done and production will begin in the 2016/2017 time frame.
A large expansion will be the same manufacturing process as the one currently being built in Fab 4 and will make a 23% efficient module or better. The logic behind building this smaller plant before building 1 GW or more of new capacity is that it's a new manufacturing process and engineers need to become comfortable with how the process works before rolling it out on a large scale. This isn't unusual in manufacturing, but it can sometimes be frustrating for investors to see expansion happening more slowly than sales channels would allow.
Like the moves in residential solar, SunPower's slow and steady capacity expansion is more conservative than what many competitors may do, but remember that the company was on the brink just a few years ago.
Is commercial solar a big priority in 2014 and beyond?
The residential solar market is garnering a lot of the attention on Wall Street, but it's actually commercial solar that's a bigger business nationwide. For companies like SunPower, the advantage is that you can sell many MW of systems to a single buyer and the company's efficiency will matter more to sophisticated buyers who are basing decisions on price per kW-hr than a lease payment.
Werner told me that commercial solar remains a huge focus and it's about the same size as residential solar in the U.S. The 20 MW datacenter project announced on the call was also important because it's the largest C7 installation in the world and could open up an important growth market considering the power needs of the cloud infrastructure. Also, reading between the lines, 20 MW is the same size as Apple's two other power plants built by SunPower and it's building another new datacenter, so we can assume with high probability that this is Apple's datacenter as well.
Commercial solar won't get the publicity of residential or commercial projects, but it's still a high priority for SunPower.
We recently learned that SunPower will provide the solar cells for Ford's (NYSE: F) C-MAX Energi, powering the vehicle's electric battery while the sun is out. The thin, high-efficiency cells SunPower makes are perfect for consumer products like this and I asked Werner if this was going to be a big business going forward.
While Werner sees SunPower as the perfect supplier for commercial products and is more than happy to add high-margin products for consumers to the portfolio, commercial products won't be a big piece of the company's business for at least five to 10 years. So, it's on his radar but SunPower isn't yet seeing a lot of demand from electronics or carmakers.
In another decade, I think commercial products will be a meaningful business of SunPower and it will be interesting to see how it develops. Electronic devices are everywhere and if companies can find a way to incorporate solar cells in their devices, it will ease the need of charging and provide a cheap power source. This will be a big business someday, just not for a while.
Foolish bottom line
With the most efficient panels in the industry and a strong pipeline in utility, commercial, and residential solar, SunPower is definitely well set up for the future strategically. I think it could even expand more quickly if Werner and his team were more aggressive with capacity expansion. With that said, the slow and steady strategy of growth is understandable given the history of epic collapses in solar and the long lead time building capacity but it's also why the stock isn't as hot as SolarCity's.
I think this is a great solar company to own long term, but it will likely never garner the same premium that SolarCity has right now, despite being much larger. But for investors looking for profits and growth in solar, there's no better company to buy right now.
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