In 2016, a few negative market trends converged on SunPower Corporation (SPWR -40.08%) all at once. Falling solar panel prices put pressure on margins as the year went on, investors demanded higher rates of return for solar projects the company sold, and the investment tax credit (ITC) extension led to little urgency for utilities to sign new solar contracts.

SunPower responded by laying off a quarter of its staff and cutting back production of its E-Series solar panels that have lost most of their efficiency advantage over the competition. That will lead to a reduction in solar shipments over the next year as the company converts production to the lower cost P-Series product and the high efficiency X-Series. With those strategic changes in mind, here's what to watch in 2017.

Image source: SunPower.

Will P-Series and Oasis be SunPower's savior?

One of the big moves SunPower made in 2016 was to change its strategy in utility scale solar. The company updated its Oasis power plant design to be lower cost and more versatile in the hopes of winning more business in the future. But a key part of the utility strategy will be the P-Series solar panel that's just beginning production.

P-Series is a panel construction that layers solar cells like shingles, allowing for a higher efficiency panel than the traditional panel construction. The cost is slightly higher than conventional panels per watt, but also slightly higher efficiency. The company is hoping the combination will allow SunPower to better compete with commodity solar competitors, something it wasn't able to easily do with the E-Series product.

We won't know for some time what the margin of Oasis and P-Series will be, but in 2017 we should look for SunPower to start winning competitive bids to build solar farms with these two products. If that takes place SunPower will be able to grow its gross profit from low levels in 2017 and the hope is that will eventually lead to higher profitability. Contract wins will be the first sign the combination of P-Series and Oasis are paying off.

Image source: SunPower.

How big can the residential solar business get?

The one bright spot for SunPower in 2016 was the residential solar market. High efficiency X-Series panels are in high demand and the Equinox system design is proving to be a timely product introduction. Gross margins in residential solar were 20.6% in the third quarter, which makes it the most profitable business SunPower was in during 2016.

What's been difficult for SunPower is growing the residential solar business beyond 300 MW-350 MW per year. Long term, SunPower needs to see the residential solar business trend toward a 1 GW business annually, which isn't unreasonable given the market's over 10 GW size globally and 2 GW market size in the U.S. alone.

Rooftop solar is the one place high efficiency has a significant competitive advantage and SunPower needs to gain as much market share with its X-Series product as possible. In 2017, investors need to see increased traction and market share gains in the residential solar market. As the one bright spot in the business, this will be a key segment for SunPower.

Balance sheet stability will be key to long-term survival

I've outlined how SunPower plans to improve its utility and residential businesses in 2017 and beyond, but a key that shouldn't be overlooked is the balance sheet. SunPower still has $2.1 billion of debt on the balance sheet, about half of which is associated with specific projects and the other half is mainly in convertible notes that begin coming due in 2018. For the next year, deleveraging that balance sheet by selling projects (something that's already begun) and remaining cash flow positive will be key.

While I think the strategies the company is taking in utility and residential solar are positive, they'll also take time to pay off. 2017 is about survival with a solid balance sheet, building a foundation for growth in 2018 and beyond.

Another factor that shouldn't go overlooked is SunPower's majority owner Total, which has demonstrated its financial backing of the company. Total could help provide bridge financing for SunPower's business in the next few years and provide demand by developing its own solar projects in tandem with SunPower. With a 66% stake in SunPower, Total has every incentive to help the company succeed. And that may give it the leeway it needs until new products begin taking hold in the marketplace.

Will 2017 be a better year for SunPower

The massive drop in SunPower's stock during 2016 was driven by uncertainty about 2017 and as time goes on the uncertainty starts to clear up. What we know is that demand for 2018 is already starting to materialize with 517 MW of projects already signed. As the year goes on, I would expect more backlog for 2018-2020 to start to fill in, giving investors more confidence in the company's future.

While there are risks ahead, the technological advantages, design innovation, and backing from Total gives me confidence 2017 will be a better year for SunPower's stock than 2016 was. Despite the dark days of the past, the solar industry does have a bright future and SunPower should benefit as an industry leader.