There's no question that SunPower Corporation's (NASDAQ:SPWR) high-efficiency, high-cost solar panels will be affected more than competitors' products by the Trump Administration's recently announced solar tariffs. Simply put, a 30% tariff will hit a higher cost solar panel to a greater degree than it would a cheaper one.
But the impact doesn't seem to have dimmed SunPower's optimism for the critical residential and commercial solar markets, collectively known as distributed solar. Here's why SunPower is so bullish on distributed solar in 2018.
Critical details for SunPower
First, it's important to point out that SunPower has between 3.5 and six months worth of solar panels for distributed solar projects, depending on installation timing. That provides some leeway for the business.
Management will also seek an exclusion for SunPower's interdigitated back-contact technology, which isn't currently made by other U.S. manufacturers. If trade officials decide to grant SunPower an exclusion, we could actually see tariffs drive higher margins in residential and commercial solar in 2018. But even without an exclusion, management is bullish on the U.S. solar market.
Residential solar expected to grow
SunPower has gained market share in the U.S. over the last few years as it's pushed the Equinox solution, which matches X-Series solar panels with racking, inverters, and other components. As the product has become a larger percentage of sales, gross margin has improved to the low 20s.
Margins may be hit by tariffs, but management still expects growth in 2018, not only in the U.S. but also around the world:
Looking forward, we expect continued growth in all of our residential markets during 2018.
That's a bullish sentiment given tariffs in the U.S., and it shows SunPower isn't losing sight of the fact that residential solar is a key to the company's future.
Commercial solar is evolving
The commercial solar market has always been challenging as it's more price sensitive than residential solar. Because commercial customers typically have consumption and demand charges, it's more difficult to make the economics work.
SunPower's commercial business relies on high-efficiency solar panels and a platform of racking and electronics products, soon to include energy storage. The platform allows SunPower to sell into rooftop-, carport-, and ground-mounted solar systems. And management expects to gain market share this year:
We are bullish about the commercial market with a solid pipeline of more than $2.5 billion, approximately 85% of our 2018 plan already booked or awarded, we are well positioned to increase our share in commercial again this year.
I will note that management didn't say sales would grow in the U.S., mainly because the commercial solar market may shrink, but a forecast of expanding market share indicates confidence that tariffs won't cripple SunPower's commercial solar business.
Weathering the storm
Even if SunPower doesn't get an exclusion from solar tariffs for its high-efficiency products, the company may be able to weather the tariff storm. It can do that because it sells more than just solar panels; it sells a complete solar solution, increasing sales dollars per watt manufactured. Tariffs may squeeze those margins, but not as much as for competitors who sell only solar panels.
The upside for investors is that if SunPower receives an exclusion, management expects a positive impact of $50 million to $100 million in adjusted EBITDA in 2018. That would be a welcome surprise indeed.