SunPower's (NASDAQ:SPWR) stock fell 14% yesterday despite an incredibly good quarter and a number of analysts raising their price targets on the stock. The factor that traders pointed to was disappointing revenue guidance for the third quarter, which some think means that the company's growth is slowing. But is it?
The growth numbers to watch
SunPower is not only in the module-making business, but it builds solar systems and finances solar leases as well. If it only did one of these things, revenue comparisons may mean something, but since it is in all three businesses it renders the revenue figure meaningless unless you include context.
The current context that's needed is that SunPower pulled some systems revenue into the second quarter from the second half of 2013. Since systems include the balance of system costs and generate a high margin, they create far more revenue. Therefore, revenue was higher than expected in Q2 and will be lower in Q3. The leasing business may also be having an effect. Leases generated almost no revenue in the quarter; they're installed, and instead generate revenue over a 20-year period. If SunPower grows its leasing business in the third quarter it will have a drag on revenue. An even larger effect on revenue would be if systems shipments fall and are replaced with lease installations.
What investors should really watch are shipments to indicate how SunPower is growing. This will keep the company's plants utilized and will show that adoption of SunPower's products is gaining traction. During the second quarter shipments rose to 277 MW from 173 MW in the first quarter, and management noted that capacity is essentially sold out for the next 18 months.
No matter what revenue does, the fact that SunPower is selling out its products and will sell about 1.1 GW of solar panels in 2013 is hugely positive for investors.
Don't look to Cramer for insights
Case in point about the market not understanding solar is Jim Cramer saying that he would sell SunPower yesterday in favor of First Solar (NASDAQ:FSLR). First Solar has an uncompetitive product that can't be sold in the retail market because Chinese panels are more efficient at the same cost. The only thing keeping First Solar alive is huge utility-scale projects, and the company's backlog of those projects is dropping every quarter. I'm not saying that First Solar is a dud, just that industry trends are working against it but for SunPower.
What to look for during earnings season
SunPower is in a unique position by owning module plants, building utility-scale projects, and being involved in leasing. For its competitors, there are easier keys to watch during this earnings season.
When First Solar announces earnings next week look for cost trajectory and where the company's backlog stands. The systems business is basically all of First Solar's business now, and the momentum of signing projects has slowed, so that fact will be key for the stock.
At SolarCity (NASDAQ:SCTY), the momentum of installations will be key and so will margins. SolarCity is spending a lot of money upfront to grow its business -- once it reaches a critical mass the profits from each installation will begin rolling in and won't stop for 20 years.
These factors will be more important than either revenue or earnings for First Solar and SolarCity in the short term.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.