SunPower Corporation (SPWR 16.14%) has had a rocky last five years to say the least. The company was hot at the start of the run, moving into project development, launching a yieldco, and expanding manufacturing. But the pressure from commodity solar panel manufacturers and falling margins for solar system developers have sunk the company's finances and its stock.
Today, SunPower has shed some of those businesses and is focused on being a premium solar panel and solutions provider for residential and commercial solar developers. It's also making some commodity-type solar panels called P-Series, but ultimately the smaller-scale solar projects will be the company's bread and butter, which is what investors should keep their eyes on.
If SunPower is going to be a success in solar energy in five years, it'll be because of the A-Series solar panel. The product is more efficient than commodity panels (which are 15% to 18% efficient) at as much as 22.8% efficiency in turning the sun's energy into electricity. Its cells are 65% larger than older X-Series modules, which is intended to lower costs while maintaining high efficiency.
The challenge has always been that SunPower hasn't been able to charge enough of a premium on its panels to make the product profitable. In the second quarter of 2019, the gross margin for residential sales was just 8% and for commercial sales was 13.1%. If A-Series production lives up to its promise, both of those figures should push into the low 20s over the next five years, and profitability would follow. Production is also expanding from 100 megawatts (MW) of annual capacity today to more than 1,000 MW each year, replacing existing production from similarly constructed panels. If SunPower finds partners to fund an even larger expansion, it could be making 2,000 MW or more of A-Series panels each year by 2024.
Adding to the high-efficiency panels will be energy storage, which is already being included in about one-third of commercial solar systems. But in five years, it should be standard with residential and commercial solar systems. SunPower isn't going to make batteries itself but rather buy commodity batteries and include them in an energy service package for customers. This approach makes the battery economical for customers, adds value to the grid, and makes more money for SunPower.
Add in the growing capacity of A-Series solar panels with energy storage, and SunPower should have a solid foundation in small-scale solar five years from now. I wouldn't expect the company to be wildly profitable, but it could be a solid cash generator for investors.
Utility solar is a wild card
SunPower now has about 2,000 MW of annual capacity for P-Series solar panels, which assemble commodity solar cells into a panel slightly more efficient than the competition's. The product commands a small premium compared to commodity panels but isn't terribly different from what others make.
There are two ways the P-Series product can go for SunPower. One is that it remains competitive and SunPower sells some into commercial markets, where it can be more economical than A-Series panels; the company sells the remaining panels into utility markets, where it's going to have a lot of pricing pressure. In both cases, SunPower might not have the scale to make this a big business without a lot of investment in new capacity, and I don't see that happening given its renewed focus on small-scale solar and A-Series technology over the last year.
The other option is that P-Series doesn't prove to be financially viable and is shut down or sold to a competitor. It has value to someone, but it may not ultimately fit into SunPower's high-efficiency future.
P-Series is a wild card for SunPower over the next five years. The advantage is that it uses commodity solar cells, so it's not as susceptible to rapid cost reductions as SunPower's previous technology, which was made primarily in-house. The downside is that it's fundamentally a commodity product, and that's never been a great business in solar energy, especially for a company that doesn't have as much scale as large competitors.
SunPower's underappreciated assets
There are some reasons to like SunPower's underlying assets over the long haul. One quietly valuable asset is SunPower's 7.5 million shares of Enphase Energy (ENPH 5.44%), which are now worth $240 million. The stake was part of a deal that sent SunPower's microinverter technology to Enphase, and SunPower agreed to buy Enphase's products for its solar panels. So far, the deal seems to be a win-win.
SunPower is also an indirect equity holder in more than 55,000 residential solar leases and holds some commercial leases on its balance sheet, which all have value long-term that isn't normally accounted for by investors.
Where might SunPower go?
SunPower is trying to position itself as an energy solutions company for homeowners and businesses, and that's probably the right strategy, despite some risks. Customers don't want to think about their energy usage or go to the efforts of charging and discharging a battery to optimize value. They will instead look to companies like SunPower to offer these services. This is where I think it has the potential to add a lot of value and generate a strong return for investors.
The risk is that competitors could undercut the company's products, whether that's commodity solar manufacturers or other solar installers. This competition has led to weak margins in the past, and that may continue depending on how much customers value SunPower's premium product.
I think SunPower will be a valuable solar company in the future, but it might not be a blockbuster stock. There are too many competitive pressures, and manufacturing expansion is too expensive for the company to be a home run stock. But slow and steady could win the race in the solar industry over the long term, and SunPower has pole position in small-scale solar, where efficiency is king.