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Investment Overview for SunPower (NASDAQ:SPWR)
Below are key drivers of SunPower's value that present opportunities for upside or downside to the current Trefis price estimate for SunPower:
- SunPower's Americas EBITDA Margin:
SunPower's Americas EBITDA Margin plummeted from around 13% in 2010 to less than 5% in 2011 due to weak market conditions. However, they recovered to around 9% in 2012 on the back of higher revenues from the construction of utility scale power plants. In 2013, margins once again recovered to around 12.5% on the back of construction activity on the company's large North American projects. Margins stood at around 19% in 2014, likely due to the execution of the company's Solar Star mega-project that it is building out in California for MidAmerican Energy. We expect EBITDA margins will gradually increase to around 21 % by the end of the Trefis forecast period as production costs continue to decline while renewed demand provides support on the pricing side. However, should pricing remain depressed and margins stabilize at around 15% there could be a downside of around 25% to the Trefis price estimate. Conversely, if margins rise to around 26%, there could be an upside of around 25% to the Trefis price estimate.
- Average Selling price Americas:
The average price declined from $4.42 per watt in 2010 to $3.22 per watt in 2014 due to a reduction in manufacturing costs in addition to extremely weak market conditions and strong competition. We expect prices to decline and stabilize at around $3 per watt over the long term as a decrease in module prices could be offset by an increase in sales of solar power systems. In a scenario where prices actually declined to around $2.5 by the end of the Trefis forecast period, we could see a 10% decline from the Trefis price estimate. Alternatively, if the average selling price in the Americas increases to $3.50 by the end of the forecast period, we could see an upside of around 10% to the Trefis price estimate.
SunPower is a manufacturer and distributor of silicon based solar modules which are used to convert sunlight to electricity. The company produces solar power products for installation on residential and commercial units as well as large scale, utility sized projects. SunPower's solar modules have among the highest conversion efficiencies in the industry. The company also develops solar systems including rooftop- and ground-mounted solar systems. In 2011, Total S.A. of France acquired a majority stake in the firm.
We estimate that sales of modules and solar systems in the Americas account for most of the company's value. This is partially due to the following factors:
Increased utility-scale footprint
Solar cells manufactured by SunPower were historically used for installation on residential and commercial units. However, the company has been steadily increasing its presence in the utility scale market, constructing some of the world's largest solar farms such as the 579 MW Solar Star project, helping to improve margins. Most of these higher-margin utility project sales are in the Americas.
Growth opportunity in rooftop solar
Rooftop solar is expected to be the fastest growing segment in the global power industry. According to Bloomberg New Energy Finance, rooftop solar will account for 20% of all gross electric capacity additions globally through the year 2020, outpacing other renewable energy sources including utility solar and wind energy. This is likely to be a net positive for SunPower, given that the company specializes in higher efficiency solar panels that are well suited for rooftop applications.
Legislature and incentives to aid renewable energy projects
Governments all across the world have taken measures to encourage the use of solar technology as a way to help them remove their dependence on fossil fuels. For instance, in the United States, at the Federal level, the government offers incentives including an investment tax credit (ITC) of around 30% on the initial cost of a solar system. While the ITC is slated to expire in late 2016, there is also legislation at the state level, such as the renewable portfolio standards, that require utility companies to generate a certain portion of their electricity from renewable sources. Countries such as China and Japan also offer incentives in the form of feed-in-tariffs that allow photovoltaic plants to sell electricity for above market rates.
Environmental concerns driving renewable energy growth
Fossil fuels are limited in supply, with easily extractable reserves quickly being depleted due to worldwide economic growth. As the world approaches peak oil, the scarcity of new reserves will likely drive up the demand for renewable energy. Furthermore, current energy production methods release pollutants like smog, as well as carbon dioxide gas, which contribute to the greenhouse effect and global warming. Solar energy production produces little, if any, pollution or emissions, making it one of the cleanest sources of power. Increased popular education on these issues is creating pressure for governments and energy companies to regulate energy production. This movement is having a worldwide impact on energy regulation in the form of global emissions caps.
Improved conditions in the solar markets
Solar panel prices have seen a continual decline over the last several years, as new capacity expansions led to a glut in the global markets. For instance, in 2013, while global solar capacity was estimated at about 50 GW, demand was well below 40 GW. However, things could change going forward as effective manufacturing capacity is expected to remain stagnant in the near term, as companies have been curtailing expansion projects. During 2013, spending on photovoltaic manufacturing equipment fell to an 8-year low of around $1.73 billion down from a peak of about $13 billion in 2011. However, demand is expected to grow at reasonably healthy rate, rising to about 60 GW in 2015, according to Bloomberg New Energy Finance. This should help to bolster pricing going forward. The long term prospects are also encouraging. According to Bloomberg New Energy finance, renewable energy could represent up to 65% of the $7.7 trillion that will be invested into power plants through 2030 and about 60% of the roughly 5,600 GW of the new capacity additions over the same period. Solar power is likely to command the largest portion of this investment.
Emerging solar markets will account for bulk of future demand
China became the worlds largest solar market in 2013, overtaking Germany as the worlds largest solar market. Other emerging markets such as Latin America and the Middle East are also becoming important markets for solar power, given a combination of high electricity prices and strong consumption growth.
Project financing is getting easier
Financing for solar energy projects has been an issue in the past and developers have largely relied on complex tax equity investments or expensive bank debt to fund projects, as they have had difficulty tapping into cheaper sources of capital due to the lack of long-term data on solar power, and also due to the perception of solar as being risky and unproven. However, the decline in solar systems prices of late, as well as the improvements in panel technology, have brought about a greater acceptance of solar power and have made solar assets increasingly attractive. SunPower has been exploring various means to expand funding for its solar systems business. For example, the company is planning a joint yieldco along with rival First Solar. The company has also indicated in the past that it would issue solar asset backed bonds. These moves could help the company reduce cost of capital and maximize value from its projects business.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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