SunPower's headquarters building. Image source: SunPower.
When people think about renewable energy a few names probably come to mind. Tesla Motors gets a lot of headlines with its electric vehicles and potential energy storage products coming later this week. Sister company SolarCity (SCTY.DL) is the biggest name in residential solar and has taken the country by storm in just the last few years. Then there's First Solar (FSLR -2.21%), who is still one of the biggest companies in solar and SunEdison (SUNEQ), who has become the biggest renewable energy installer in the world.
But the renewable energy company that's often overlooked is SunPower (SPWR -2.60%). It's not the flashiest of companies and it's not as high growth as some of its competitors. But it has some key advantages that make it my favorite renewable energy stock.
SunPower's C7 product concentrates the sun's rays onto high efficiency solar cells. Image source: SunPower.
The best technology
Most of the growth in the solar industry over the past few years can be attributed to rapidly falling costs for solar panels and installation related costs. As recently as 5 or 6 years ago a solar panel cost $2 per watt or more and today a commodity panel sells for $0.50 to $0.60 per watt. Combine falling costs for other parts of the system and rapidly improving financing and companies like SolarCity can sell solar leases for less than what customers pay for electricity from a utility.
But at its core, solar energy is still about technology. And on the technology front very few low cost solar panel manufacturers are doing anything different than manufacturers were doing a decade ago. Most companies use the same equipment, resulting in very similar products, making most solar panels a commodity.
SunPower makes a fundamentally different solar panel that instead of being 14%-16% efficient, like those panels used in a typical SolarCity installation, will convert up to 21.5% of the sun's energy into electricity. This gives the company a fundamental technology advantage that's just starting to show its value.
With a high efficiency product SunPower can put more energy generation on a residential rooftop or concentrate the sun's energy with a product like C7 (seen above) to capture more energy from a smaller space, which leads to long-term cost advantages. Combine that with the fact that SunPower's back contact construction and mono-crystalline base makes a product that degrades more slowly than the competition, and you have a product that will create 70% more energy than a conventional system can.
Image source: SunPower 2014 Analyst Day presentation.
Positioned for the next industry transition
SunPower's efficiency advantage sets the company up perfectly for the next wave of changes in the solar industry.
The first change will be in the residential market, as it moves away from leases and toward loans. Long term, there's no reason to think leases will be the industry's dominant financing option, especially as system costs come down, complex tax incentives are reduced, and loans become more prevalent. When that happens, SunPower can then compete on a product basis, offering a better-looking product, more power generation, and higher quality than competitors.
An advance that will impact both the residential and commercial markets over the next decade will be energy storage and moving toward energy as a service. SunPower has partnered with Tendril and EnerNOC (ENOC) to provide the necessary information from residential and commercial systems respectively, to make new advancements like demand response and energy management possible.
This move to making energy a service with on-site production and storage will be key for growing in the commercial market, a place where SunPower can leverage its superior products with a much smaller sales force than investing in the residential market.
SunPower makes money
Here's a novel concept: SunPower is actually a profitable company. Take a look at the chart below showing the profitability of SunPower versus SolarCity and SunEdison, which are both more valuable on the stock market.
SPWR Net Income (TTM) data by YCharts
Net income doesn't tell the whole story for any of these companies, but it's a way to measure the value we're absolutely certain they can create. Retained value, which SolarCity and SunEdison push on investors, is an approximation of value, but it contains highly favorable assumptions that may not actually come true, something investors need to keep in mind.
The net income above also doesn't show SunPower's true value. The company is holding about 100 MW of projects per quarter on its balance sheet, some in anticipation of the 8point3 Energy yieldco launch with First Solar. These projects are expected to generate about twice as much value per watt as selling systems earlier in the development process, the way the company has typically operated thus far.
In an industry where conditions change very quickly, I'll take the company that starts from a profitable base over the one with some unknown future value creation any day.
SunPower's installation growth plan. Image source: SunPower.
Growth has just begun
SunPower is as well positioned as any solar company today, but over the last five years it's really been in survival mode. When the world was oversupplied with solar panels in 2011 and 2012, panel prices plunged and SunPower had to lower prices and margins just to compete. In the last three years, it has transitioned to focus on building systems, not just supplying panels, but hasn't really grown at all.
That's about to change. As you can see in the chart on the right, SunPower is expanding system production over the next five years in an effort to triple installations. More solar cell manufacturing will be part of that plan, but so will growth in concentrated solar power plants (denoted by LCPV, or low concentration photovoltaic). This growth, along with the value from the previously mentioned yieldco, should help make for a significant increase in earnings in the future.
Why SunPower is the best in renewable energy
With a technology lead in a growth industry and a business model that's set up for the future, SunPower is my favorite stock in all of renewable energy.
But keep in mind that the industry changes quickly and some companies will grow more or less than others. So I'm looking at this from a holistic perspective and considering growth opportunity, sustainable advantage, and risk as well. Other renewable energy stocks could certainly outperform SunPower over the next 5 or 10 years, but I think they're higher risk.
When growth, risk, value, and all the other factors are considered, my money is on SunPower. Now it's time for investors to watch and see if this investment thesis plays out as planned.
