The stock market certainly didn't like SunPower's (SPWR 4.52%) earnings report on Wednesday, and the stock dropped double digits as a result. Consensus seems to be that the market wasn't happy with "only" a 35% growth projection for 2021, despite that being the best growth the company has reported in years.
While the initial reaction may have been negative, there were some positive trends for SunPower. The company's margins are improving, energy storage is growing, and the recent blackouts in Texas could open up a massive market to solar and energy storage. Here's what you should know.
Image source: SunPower.
Behind the numbers
On the surface, SunPower's quarter didn't look all that impressive. Revenue was down 14.9% from a year ago to $341.8 million, and adjusted net income was just $26.6 million, or $0.14 per share. But the trends within those numbers are impressive.
The drop in revenue shouldn't be surprising since SunPower spun off its manufacturing business, Maxeon Solar Technologies, in 2020. What was critical to the company's future is the increase in residential solar margin from 18% in the third quarter to 24% in the fourth quarter, and commercial and industrial gross margin coming in at 18% after years of hovering in the single digits.
SunPower has always struggled with higher costs than competitors, and that led to low margins in the competitive solar industry. But the company's current strategy appears to be paying off and management sees conditions getting better. It projects that adjusted EBITDA should more than triple from $40.1 million in 2020 to over $120.3 million in 2021. And it expects at least 40% improvement in EBITDA in 2022, implying at least $168.4 million in EBITDA next year. When revenue growth and margin expansion combine, EBITDA and earnings can grow extremely quickly.
Driving results is SunPower's new asset-light business model. So far, it appears to be performing about as well as planned.
The new strategy at SunPower
There are a few major changes SunPower has made to its business recently that may allow it to both grow more quickly and increase margins. On the growth front, after spinning off its manufacturing business the company is focused on serving third-party installers with the hardware and services they need to install solar energy. That will allow SunPower to scale quickly because it can add partners across the country and ride the wave of organic growth from existing partners.
On the margin front, a growing portion of SunPower's business is software and financing services. This allows the company to leverage the upfront investment made to build a nationwide bidding tool, monitoring, and other services and increase profitability with each incremental customer. SunPower's gross margins have been rising steadily over the past two years, and management expects margins to continue to rise over the next two years.
SPWR Gross Profit Margin (Quarterly) data by YCharts
The icing on the cake for the business is energy storage. When customers choose to add energy storage to a solar installation there is an incremental increase in the value of the project, but there's also the opportunity to generate recurring revenue for decades. SunPower is providing the control system and monitoring for residential and commercial energy storage, and this will allow it to bid storage into the electricity market and provide other energy services to customers long term. Energy storage could create a high-margin growth opportunity for SunPower if it can scale the business.
Management thinks the combination of solar, storage, platform services, and long-term energy services are a more than $600 billion total addressable market. That may be optimistic, but we've seen this year in California and Texas that energy storage and smarter energy usage is highly valuable, and that should drive growth for some time at SunPower.
Tailwinds for SunPower
There are a few tailwinds that are worth noting that should help the company for many years.
- California has mandated solar on new homes and SunPower now sells nearly one-third of its residential solar systems to new construction. Management expects the growth rate in this segment to "exceed 40% over the next few years."
- Energy storage is already seeing attach rates of 30% for commercial projects and 20% for residential. That could increase as natural disasters and power blackouts show why storage is so important.
- After a number of years focusing on cash sales of solar systems, SunPower is seeing better financing costs and is growing its solar lease portfolio. Management estimates it already has $211 million of net retained value and $637 million in recurring revenue pipeline from the finance business.
Is there value in SunPower shares?
SunPower currently has a market cap of $6.2 billion, and with 2022 EBITDA expected to be over $168.4 million, that puts the market cap-to-EBITDA multiple in 2022 at about 37. That's not cheap for a solar energy stock, but the company is debt-free when you consider the 3.5 million Enphase Energy shares it still owns after selling its microinverter business to the company in 2018. And that an improved balance sheet will give the company a lot of flexibility.
It's understandable that the market was unhappy with SunPower's quarter, given that the stock is up 727% in the past year and expectations are now sky high. But the company is improving in all of the areas that are important, with revenue growing, margins improving, and recurring revenue stacking up. That is a formula for success for SunPower, and a reason long-term investors shouldn't give up on the stock after one quarter.
