Why We Cut Our Price Estimate For SunPower

We are cutting our price estimate for SunPower (NASDAQ:SPWR) from about $27 per share to about $23 per share on account of panel oversupply concerns, near-term challenges in the U.S. residential solar market and relatively weak visibility for the company’s power plants business. Below we take a look at some of the key factors driving our price revision.

• Although the solar industry has seen a few years of relative supply-demand balance, there’s a growing possibility that supply will outstrip demand in the near-term amid manufacturing capacity growth. Panel manufacturers have announced capacity expansions (cell, module and thin film) to the tune of 49 GW during Q4’15 and Q1’16, according to PV Tech, marking an increase of around 200% over the same period last year. This could potentially drag down panel ASPs, impacting SunPower’s pricing and margins in the near-term.

• SunPower has significant exposure to the U.S. residential solar market, which could face some headwinds amid policy changes relating to net metering in states such as Nevada and Arizona. Near-term residential sales may also be impacted by the extension of the U.S. solar ITC, which reduces the urgency for homeowners install solar systems before December 2016 to avail tax credits. Separately, financing could also be a factor to watch in the interim, given that the Fed could raise interest rates, potentially hurting funding for residential projects.

• There are concerns relating to SunPower’s power plants business as well. The Obama Administration’s Clean Power Plan, which aims to cut carbon emissions from the power sector. has been stayed in the federal courts. This could create uncertainty in the outlook for contracting activity for renewable energy projects in the U.S. While SunPower has 7 power plant projects due for completion during 2016 (as of April 3, 2016) with a total capacity of about 575 MW, the company’s project visibility for 2017 and beyond remains somewhat weak, raising concerns about the firm’s longer-term power plant outlook.

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