Five years ago, SunPower (NASDAQ:SPWR) was one of the most vertically integrated renewable energy companies in the world. It manufactured solar panels, developed projects from rooftops to massive utility-scale solar farms, and was even highly involved in solar financing. Since then, the industry has moved away from a vertically integrated model to specialization, and SunPower has been forced to adapt.
To adjust, SunPower sold off its yieldco, exited utility-scale solar development, and has now spun off its manufacturing business in Maxeon Solar Technologies (NASDAQ:MAXN). What's left is a uniquely positioned company in residential and commercial solar energy stocks.
Where SunPower stands today
SunPower's business is really contained in two segments. One is residential solar, where it works with dealers who install solar panels to provide materials and services. An exclusive agreement to sell high-efficiency solar panels from Maxeon in North America is the foundation of SunPower's solar systems,but it's just the beginning.
SunPower also provides tools and sales leads for installers, like a tool that will mock up a solar system on your roof in less than a minute. It also designs the racking, has a monitoring platform, provides financing, and is now deploying energy storage where it's providing the controls system to customers (and not manufacturing). It's a technology provider that is leveraging the scale brought by hundreds of small residential solar installers across the country.
The financing piece is critical for small installers. SunPower can offer solar leases to installers, as well as loan financing through its partners.
The second major business is commercial solar, where Sunpower has the #1 market share position in the U.S. Commercial solar has been a difficult business for years because commercial customers have lower per kWh electricity rates than residential customers but the business is starting to pick up.
SunPower has a $3.5 billion pipeline of commercial solar projects, $400 million of contracted backlog, and a 1.1 gigawatt installed base. If management can hit its goal of gross margins of around $0.30 per watt on commercial installations and increase storage attachment rate to 30% in 2021 as projected, this could be a very profitable business.
By jettisoning the manufacturing and development businesses, SunPower's capital requirements went down dramatically. Manufacturing, in particular, can require hundreds of millions of dollars of investment. The solar development business has also been very volatile, so it not only requires millions of dollars, but margins can be volatile and sometimes developments lose money.
What's left for SunPower is a very capital-light business that it should be able to grow quickly.
What makes SunPower different
There's still a lot of competition in solar energy, and SunPower is at best the No. 3 installer in the U.S. behind Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR). And those two are merging to create by far the country's largest solar installer.
What Sunrun (as the merged company will be called) has bet on is the long-term financing model of third-party financing. In other words, Sunrun finances the solar installation through a long-term lease or power purchase agreement with customers. This makes solar $0 down for customers and can lead to immediate cost savings, but the 20-year contract that comes with leases is a big commitment.
70% of SunPower's solar installations are financed through either loan or cash sales, which allows the homeowner to own the solar system. And as costs of both installation and financing come down, loans should be a better financial decision because they'll provide similar monthly savings with an asset on the home, rather than a 20 or 30-year liability the next homeowner may not want.
A new look for SunPower
The manufacturing business has long been a disappointment for SunPower. It was never able to build the scale to compete on a global level and its high-efficiency solar panels couldn't command the premium needed to make a decent margin. Spinning off that business to Maxeon is probably the right move.
In the residential and commercial solar business, SunPower has a unique role to play. It's the only national company pushing loan and cash sales, which are more cost-effective for homeowners, and with its platform SunPower can reach more of the country through installation partners. That could lead to a lot of growth and higher margins for SunPower without the capital that was once required to run its business. At the very least, this new strategy makes SunPower worth another look for solar investors.