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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:
Power plant division
- SunPower's Power Plant EBITDA Margins : SunPower's power plant margins have ranged from between 14% to 18% between 2013 and 2015. We expect the number to decline sharply in 2016 as the firm executes on lower margin projects while reducing its exposure to self developed projects. We expect the metric to gradually improve to about 13% by the end of our review period. However, if the company is able to improve margins to about 18% by the end of the forecast period leveraging its new technology deployments, this could result in a 30% upside to our current price estimate. On the other hand, if margins remain at about 10% over the long term, this could result in a 15% downside to our price estimate.
- Average selling price per watt - power plants:
SunPower's Average selling price per watt - power plants has seen significant volatility over the last few years due to lumpy revenue recognition on its large scale projects and potentially due to changes in its sales mix. We expect the number to decline steadily from levels of around $2.37 per watt in 2016 to roughly $1.60 per watt in 2023, driven by falling component and installation costs as well as competitive pressures. However, if the company is able to maintain ASPs at levels of around $2.2 through the forecast period, it could result in an upside of about 10% to our current price estimate. On the other hand, if pricing were to fall to levels of under $1.40 per watt by 2023, on account of competitive pressures, this could result in a 10% downside to our current 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 are modelling Non-GAAP revenue and cost metrics for SunPower, as U.S. GAAP defers revenues from transactions with the company's joint-venture yieldco, 8Point3 Energy Partners to the future. We expect SunPower's sales to 8Point3 to grow over the long-term.
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.
Possibility of oversupply in the near-term
While the solar industry has seen about two years of relative supply-demand balance, there is a possibility that supply could outstrip demand in the near-term, considering the significant manufacturing capacity expansion that the industry is witnessing.
Global manufacturers announced capacity expansions (cell, module and thin film) to the tune of 49 GW over Q4’15 and Q1’16, according to research firm PV Tech. This marks a significant jump over capacity expansion announcements of just about 16 GW in the year ago period. Separately, there are some concerns that demand could plummet in China during H2 2016, given the expiry of some feed-in-tariffs in late June. This could potentially hurt pricing and margins for solar companies in the near-term.
Near-term challenges in the utility scale business
Contracting activity in the utility-scale solar business has slowed down for multiple reasons. Firstly, the uncertainty relating to the extension of the U.S. solar investment tax credit, which was slated to expire after 2016, resulted in strong completions over the first half of 2016 as comapnies executed on projects to meet certain contractual milestones. However, as the ITC was extended in December 2015, it has reduced the urgency for project completions by the end of this year, allowing customers longer-term horizons to complete projects, while weakening demand for the second half of 2016 as well as 2017. There has also been greater competition from smaller players and independent power producers in the project development space, impacting the prices at which PPAs are being signed globally. Additionally, investor IRR expectations for solar projects have trended upwards over the last few months, driven partly by the bankruptcy of project developer SunEdison in early 2016 .
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. The credit, which was slated to decline from 2017, was extended by U.S. Congress in December 2015. 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. Furthermore, current energy production methods release pollutants like smog, as well as carbon dioxide gas, which contribute to the greenhouse effect and global warming. In contrast, solar energy production produces little, if any, pollution or emissions, making it one of the cleanest sources of power.
SunPower's capacity expansion plans
SunPower has been relatively circumspect with regard to its manufacturing capacity expansion plans in the past, with total capacity standing at about 1.4 GW in 2015 and capacity growth averaging about 11% over the last 4 years (which is well below the growth rate of the global solar market). However, the company is looking to expand capacity to as much as 4 GW by 2020, by ramping up production of its mono-crystalline panels at its new Fab-4 plant and also by adding roughly 2 GW of capacity for its new P-Series multi-crystalline modules, that it intends to assemble using conventional crystalline silicon solar cells. This should allow SunPower to cater to global solar demand growth going forward.
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.
Changes to the project financing landscape
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. 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.
Yieldco can drive demand
SunPower created a publicly listed joint-venture yieldco called 8point3 Energy Partners along with First Solar in 2015. First Solar and SunPower owned 31.1% and 40.7% of total Class A and B shares of the vehicle, respectively. Yieldcos reduce the cost of equity funding for renewable projects, since they allow investors to single out cash flows generated by power generation assets, without exposing them to other aspects of the parent company’s business. The yieldco structure could prove helpful for both companies, since it would allow them drop-down power plants into the yieldco and fund new projects at rates that are lower than the complex tax equity investments and bank debt that are currently common in the solar industry.
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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