Over the last year, SunPower Corporation (NASDAQ:SPWR) has essentially split its business into two very distinct segments. There's the power plant business that is producing P-Series solar modules in China and Mexico and aims to sell solar modules, racking, design, and other services to developers around the world at prices competitive with commodity producers. SunPower is betting that a little engineering in power plants will make them a little more efficient, creating a sustainable business long-term. 

On the distributed solar side (residential and commercial), the company is focusing on its high-efficiency X-Series solar modules and solutions known as Equinox and Helix, which are premium offerings. The company has an advantage in distributed solar because efficiency is valued more highly than utility projects -- where cost is issue number one -- and customers value the company's superior technology. It's this distributed segment that management is keen to expand in the next year, hinting at a new manufacturing plant, and if you look at the numbers the plan makes a lot of sense. 

Close up of SunPower's low profile rooftop solar system.

Image source: SunPower.

SunPower's growing manufacturing plans

Earlier this year, SunPower announced that it's already producing next-generation solar modules at about a 5 MW per year pace at a new pilot plant in Silicon Valley. The company has hinted that it plans to build a next-generation plant soon and it will likely use the technology being perfected at this pilot plant. 

We know that SunPower's next generation cell will be a larger size than the current X-Series product on the market. Management has said it will also be more efficient than the current product, but the biggest focus is on lowering cost. SunPower's solar modules have always been more efficient than competitors, but they're also more expensive, which has put them at a disadvantage as Chinese manufacturers cut costs. But technology matters to residential solar customers, which is where this new plant would grow the business. 

Why distributed solar matters for SunPower

A look at SunPower's operating numbers for the past year shows why distributed solar is so important. In the table below I've pulled together the total shipments, revenue, and gross margin for each of the company's main operating segments. 

Metric Power Plant Commercial Residential
MW Recognized 736 MW 311 MW 290 MW
Revenue $1,388.9 million $597.9 million $651.6 million 
Total Gross Margin $148.3 million  $45.8 million  $127.1 million 

Data source: SunPower. Table by the author. 

The power plant gross margin above is actually better than more recent performance. In the last three-quarters, power plant revenue was $938.3 million and gross margin was just $26.6 million. 

If you were going to expand any segment above you can see that it should be residential solar. And with just 350 MW of capacity for X-Series solar modules, a new plant could have a big impact. 

A next-generation plant could have a big impact on SunPower's financials

In the past year, SunPower's average sales per watt of residential solar systems deployed were $2.25 and gross margin was 19.5%. That means that each 100 MW of high-efficiency production could add $43.9 million in gross margin to the business. A 500 MW plant would add $439 million of gross margin, more than the total $330 million to $350 million operating expense guidance for the whole company. That's also more than the $321.1 million in gross margin SunPower has delivered in the past year (resulting in a net loss). 

It's even possible that margins will expand if the next generation product lowers costs enough, giving, even more, margin upside. 

I think it's clear that SunPower needs to expand its production capacity in a big way to take advantage of its most profitable business segment. And if lower costs for the product result in higher margins than we've seen in the past year then the company could be extremely profitable going forward. In the next few months, we should find out what the expansion plan looks like. 

Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.