Interest in renewable energy sources has soared immensely and continues to rise with each passing day. Two key forces are behind this surge: Increased awareness and urgency to address climate change, and falling costs of generation using renewables. Among renewable sources, solar energy looks most promising, due to its more predictable generation pattern. Solar's share in electricity generation is expected to rise from roughly 3% currently to more than 20% by 2050. SunPower (SPWR -1.02%) is one stock poised to benefit from these trends. Let's see why.
Going capital-light
In its long history of operations, SunPower has tried its hands at almost every aspect of solar business. It now feels that the best way to increase its profitability is to focus on just the technology and marketing side of the business. In August, SunPower completed the separation of Maxeon (MAXN -7.65%), which manufactures solar panels. SunPower will continue sourcing the panels from Maxeon. SunPower now focuses on technology innovation, marketing, and the emerging solar products and services markets. This focused approach will allow SunPower to leverage its strength in these segments.
Image source: Getty Images.
This is SunPower's second major step toward becoming a more specialized player in solar technology, after the sale of its microinverters business to Enphase Energy in 2018.
Another key benefit of this specialization-based strategy is a reduced strain on the balance sheet, helping SunPower to lower its cost of capital. Solar companies face significant competition on the costs front, especially from low-cost Chinese manufacturers. Products can soon become commoditized unless the offerings are differentiated. So, companies require continuous investments in innovation. Thus, a lower cost of capital could be a key differentiator and growth driver for SunPower.
Storage products
The rapidly expanding storage products market is a major growth area for SunPower. Lots of energy produced gets wasted if it can't be stored for later use, when it's needed. Storage solutions help adjust energy supply with demand and could considerably increase solar energy's competitiveness with conventional energy sources. The demand for storage solutions thus continues to surge.
SunPower expects more than one-fourth of its sales in 2021 to also include storage products, up from 11% in 2020. Storage products add around $0.16 per watt to SunPower's margin. So, more modules with storage products can significantly boost the company's margins. SunPower expects its gross margins to rise from roughly $0.31 per watt in 2020 to around $0.45 per watt in 2021. Considering it grew its gross margins from $0.24 per watt in 2019 to $0.31 per watt in 2020, this target looks realistic.
It could be challenging for SunPower to maintain such high margins even though the company's low-cost, capital-light strategy equips it to an extent for margin pressures. Moreover, the company is looking at innovative ways to reduce its sales and marketing expenses, which are currently denting the company's bottom line.
Underpenetrated market
SunPower is the top solar provider in the commercial segment. It expects continued growth in this market. In the light commercial segment, SunPower's storage product, Helix, is expected to boost sales to both existing and new customers. SunPower expects 5% to 15% growth in light commercial revenue in 2021. Another growth avenue is the community solar market, which represents a largely untapped market with a size of around half of the commercial and industrial market.
Similarly, in the residential segment, just 2% homes in the U.S. are currently solar powered. In the new homes market, solar capacity is expected to triple by 2025. Likewise, the storage products market is largely unpenetrated, with just 0.1% of homes in the U.S. having energy storage solutions installed.
With a huge government push, California leads the way in solar adoption. Still, only 9% homes in California have solar installations, representing a huge untapped market. In the new homes segment, SunPower has headway, having already worked with 18 of the top 20 builders in California. The company captures more than half of California's new homes market.
Is SunPower stock a Buy?
SunPower's track record of profitability is spotty. However, its current specialization-focused strategy looks promising. Its low-cost model positions it well to compete on pricing. The company can leverage its vast customer base to sell its storage products. Moreover, its leading position in the commercial and California's new homes market provides SunPower an edge over others in these segments. Conducive governmental policies and solar energy's growth potential provide additional tailwinds to solar companies. All this means that SunPower's new strategy has a good chance of succeeding.
SunPower expects to be operating cash flow positive in the fourth quarter and remain that way going forward. If that happens, it'll firmly place the company on a sustainable growth path. That makes SunPower stock a great addition to your solar portfolio.
