Over the past year, nearly everything that could have gone SunPower Corporation's (SPWR +0.00%) way has. It has demonstrated strong margins and rising market share and margins in residential and commercial solar, it sold off non-core assets, and it was recently granted an exclusion from solar import tariffs that will save around $100 million annually.
Despite all of this good news, SunPower's stock has gone nowhere, stagnating as investors decipher what the direction of the solar industry is.
Image source: SunPower.
An efficiency advantage that's growing wider
SunPower has always been the solar industry's efficiency leader, making solar panels that are up to 23% efficient at turning the sun's energy into electricity. That easily beats the 15% to 18% efficiency for most solar panels, but efficiency has long come with a price tag that can be as much as double that of commodity solar panels.
But SunPower has been able to leverage high efficiency in residential markets where customers will pay a premium to pack more energy production onto each roof. That's resulted in the strongest segment gross margins of any market for SunPower, at 21.8% in the second quarter and at least 16.7% over the past year. Commercial solar margins have lagged residential at 6% last quarter, but management expects margins to pick up as costs come down, and that may come sooner rather than later.
The next-generation technology, or NGT solar technology that SunPower is upgrading to right now is expected to lower costs to a level similar to commodity solar panels while maintaining the 23% efficiency level. If management can hit these price targets, SunPower should be able to expand margins further and increase profitability as a result.
Guidance that shows a value stock
Earlier this month, SunPower got relief from President Trump's solar tariffs, which is expected to save the company about $2 million per week. Before SunPower's tariff exclusion came to light, SunPower's management expected $95 million to $125 million in adjusted EBITDA on $1.8 billion to $2.2 billion of non-GAAP revenue. Now that the exclusion has been granted, the company could save $100 million annually in tariff costs. That money will flow directly to the bottom line, increasing annualized adjusted EBITDA by nearly $100 million for the rest of the year.
As NGT technology is rolled out, we should also see margins and profitability increase. SunPower will even be able to increase production given the increased capacity of NGT production facilities producing over 50% more watts than the production lines they're replacing.
SunPower is a steal today
The implication of guidance and tariff savings is that SunPower can generate around $200 million in EBITDA annually on existing products with more growth ahead. That compares to a market cap of just $1.1 billion and net debt of $1.1 billion. Enterprise value to implied runrate EBITDA is just 11 times, a decent value for a company with a bright financial future.
SunPower has refocused its business on high-efficiency solar production and sales to residential and commercial markets, where efficiency is valued. A tariff exemption combined with lower cost production in the future will help drive higher margins, something I don't think investors are pricing in today. As a result, I think SunPower is a great solar energy stock to buy today.
