How High Can SunPower Go?

Since SunPower (SPWR -8.41%) started its incredible run in late 2012, I've gotten a couple of questions over and over again. First, people want to know if it's too late to get in on SunPower. To that I say, very firmly -- I don't think so. I have no idea what the market will do tomorrow or next week. I have no idea when a project sale will be announced or when a short squeeze will shoot the stock higher.

Which brings me to the second and probably more important question, which is: How high can SunPower go?

Since I'm a SunPower investor, I've wondered this myself. I think it can go higher, much higher, but let's put some numbers behind that thesis.

Pulling even with its peers
One of the challenges in comparing SunPower with other high-tech manufacturers is that the company is in a far more transitional part of an industry cycle than mature manufacturers are. The company isn't yet profitable, although it's trending that way, and the industry has yet to reach a steady state where we can expect a certain amount of revenue growth or market share. But let's look three to five years into the future and see if we can use multiples to put a valuation on SunPower.

Let's look at three companies that develop, manufacture, and sell products to consumers that take a lot of technology but often have very simple uses. I think, long-term, this is where the solar industry will end up.

Source: Yahoo! Finance.

Now let's put those multiples to work. I've multiplied these numbers by the corresponding value for SunPower and given a stock price to go along with it. Note that I used non-GAAP revenue because it smooths out lumps generated by the systems business. The last row uses existing revenue, puts a comparable profit margin on it, and then multiplies by a comparable forward P/E ratio.  

Even on the low end of this analysis, the stock is very undervalued. We're making a lot of assumptions to get here, like similar profitability to manufacturing giants, but I don't think they're a stretch at all. This is a high-tech industry that will eventually generate high profitability for those who gain a large amount of market share. 

Interestingly, First Solar (FSLR 2.17%) has a lot of upside based on these numbers as well. With the same revenue multiple, the stock would be worth between $75 and $95. That's more than double what the stock trades for now.

This gives us one way to judge SunPower's eventual value. Given a steady state of earnings, I don't think $50 per share is out of the question. But there are other factors to consider.

What about growth?
The solar industry is huge, and it's growing rapidly around the world. But one of the big challenges is the number of manufacturers vying for sales. Most industry experts expect a massive shakeout that will leave a handful of manufacturers controlling the market. Just think how high SunPower can go if it is one of those companies. For this, we need to make some wild assumptions -- but we can try.

Let's project for a minute what the company's market could be. Today's solar market is about 30 GW, and given the growth of emerging markets, I think 100 GW is achievable by the end of the decade. If there are 10 manufacturers dominant in the market (probably a high estimate) with equal share, SunPower could sell 10 GW of solar panels and projects.

Costs will obviously fall between now and then, so let's assume SunPower makes only a $0.10 profit for each watt it produces. That would be a 20% net margin if panels cost $0.50 per watt, an assumption I think is reasonable.

Ten gigawatts times $0.10 per GW is a $1 billion profit annually. Put a 20 P/E on that, and you have a $20 billion company and a $167.86 stock.

Crazy? Maybe. But maybe this is a 10-bagger in the waiting?

What about competitors
Don't think I'm being fair to competitors? That's understandable. Let's look at a few of the big names in solar.

In the preceding analysis, I've glossed over debt for SunPower. The reason is that SunPower has $418 million in net debt, and some of that is used to build projects it will sell and to pay advances to suppliers. The bottom line is, SunPower doesn't have nearly the debt problem some companies have.

But that doesn't mean investors don't have similar upside in Chinese companies. Let's look at the revenue multiple I laid out earlier (2.2-2.8) and apply it to Yingli Green Energy (NYSE: YGE), LDK Solar (NYSE: LDK), and Trina Solar (NYSE: TSL).

Source: Yahoo! Finance.

I think this lays out exactly why I don't think LDK Solar has a chance to survive without the free flow of money from the Chinese government. But it does show how Yingli and Trina could benefit if they ever turned operations around.

Clearly, Trina Solar would be the best bet of these three, but I still wouldn't take the risk. Financial conditions are bad in Chinese solar, debt is looming, and operations don't seem to improve the way SunPower's have in recent quarters. There's a reason SunPower is leading the charge, as I wrote last week.

What if I'm wrong?
Sure, any or all of these projections could be wrong. But they put into perspective what the overall possibility is for SunPower investors. It's important to keep in mind that bankruptcy is also a possibility, or the stock would probably be much higher.

All I wanted to do today is put SunPower's value into perspective. I think the stock is cheap, and if we compare with other manufacturing companies, the numbers bear that out. But for the market to catch up SunPower needs to continue to improve financial performance. If that doesn't happen, then all of the multiple analyses in the world are useless.