SunPower (SPWR) has been a leading solar company for more than a decade, but it's had arguably the most transformative year in its history over the past year. It spun off the manufacturing business that was once its biggest advantage in the market, expanded energy storage offerings, and eliminated its utility-scale solar developments to focus on residential and commercial solar.
The result has been a wild year for investors, but SunPower's business and momentum are starting to materialize. Now that we know what the first quarter of 2021 looked like, here's what you need to know about this solar energy stock.
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SunPower is finally starting to make money
The biggest challenge for SunPower has always been turning its revenue into profits. Solar energy is such a competitive business that SunPower has struggled to sell solar panels profitably long term and has had particular problems generating even mid-teens margins in the commercial solar market. Now that SunPower is focused entirely on residential and commercial solar, it's starting to see better margins.
Overall gross margin increased from 10% in the first quarter of 2020 to 16.3% in this year's first quarter. Adjusting for results from legacy operations and other one-time charges, gross margin improved from 12.1% to 18.7%. Put another way, on a per-watt basis, margin improved from $0.27 to $0.42. Any way you look at it, SunPower's margins are improving, and that's a sign that the asset-light strategy that management has built is starting to work. We've seen margin swings before, so one quarter does not make a trend, but this is at least a sign the business is moving in the right direction.
SunPower did report a net loss of $48.4 million in the quarter, but that included a $44.7 million loss on its equity investment in Enphase Energy (ENPH 0.76%), which is now worth $569 million, and $7.1 million in expenses from legacy operations. Without those two items, it would have squeaked out a profit of $3.4 million. Again, one quarter doesn't make a trend, but it looks like SunPower is heading in the right direction, and management says revenue will grow 35% this year and margins are expected to expand to $0.46 to $0.50 per watt.
President Biden could give SunPower a huge boost
Growth in the solar industry today has really been driven by policy on a federal, state, and local level. A mandate that new homes in California need to include solar panels has been a boost for SunPower, but it's President Joe Biden's infrastructure plans that could be the tailwind that lasts for a decade.
An infrastructure plan hasn't passed yet, but here are the opportunities management sees from infrastructure spending:
- $112 billion in school improvements.
- $28 billion federal building mandate.
- $27 billion in a clean energy accelerator.
- $67 billion to retrofit 2 million buildings.
In total, there could be over $225 million in market opportunity for SunPower to address. And if we see a big jump in federal buildings and schools going solar, the company would be a natural partner. Look for federal policy to turn from a headwind during the Trump administration to a tailwind during the Biden administration.
Debt is less of a problem
Another huge problem over the past decade for SunPower has been debt. The company spent hundreds of millions of dollars building solar panel manufacturing capacity only to see weak returns and debt that became difficult to pay back. Thanks to the Maxeon Solar Technologies spinoff and sale of some Enphase shares, the balance sheet is actually looking great right now.
Net debt is down from $596 million a year ago to $300 million. That doesn't include the 3.5 million shares of Enphase Energy, which are worth $569 million. And on top of that, SunPower's share of the retained value of solar projects (a calculation of the present value of all future cash flows from solar installations) increased from $186 million to $216 million.
SunPower now has nearly $500 million of net value on the balance sheet, which gives a lot of flexibility for the future. And if the tailwinds highlighted above come through, we could see SunPower's profitability and growth improve in the next few years.
What's next for SunPower
As SunPower transitions from a solar manufacturer and installer to more of an energy solutions company with solar, energy storage, and energy management solutions for homes and businesses, investors will want to watch how the new strategy is working out. Here's what investors should be watching over the next few quarters:
- Volume growth: SunPower has started to improve margins, and now it needs to translate recent strategic changes into volume growth, which has been stagnant for years. An asset-light company that's focused on software and services should be able to grow more quickly than the previous manufacturing version of SunPower, and management has already said we should expect about 35% revenue growth this year, so keep an eye on volume growth closely in 2021.
- Progress in energy management: SunPower has long envisioned itself as an energy management company, controlling when solar power is consumed, stored, or sent to the grid -- and even controlling demand devices like electric vehicles. This holistic energy solution could be SunPower's future, and it could be valuable. But the company needs to show progress on that front before investors believe this is truly an energy solutions company.
- Rising interest rates could be a challenge: One secret of the solar industry is that low interest rates really help the value solar companies create. When they finance projects long term (see the retained-value number above), they benefit from low interest rates and are hurt by higher rates. So, if interest rates do rise over the next year, it will be bad for SunPower and all other solar stocks.
The first quarter was solid for SunPower, but it'll be awhile before we know if this is a trend of improving operations or a blip before the company sinks back into a trend of low margins and big losses. I am betting on the improving trend, but we've been surprised by downturns before.
