Why We Increased Our Price Estimate For SunPower
We have increased our price estimate for SunPower (NASDAQ:SPWR), the second largest U.S. solar equipment manufacturer, from around $8 per share to about $10 per share, to account for some recent improvements in global solar demand and pricing as well as the company’s moves to address a maturing solar market. Key changes to our valuation model include higher medium-term price realizations and margins. Below we outline our current stance on SunPower as well as the changes we made to our forecasts and model.
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Improvements In The Solar Market
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While the solar industry has been witnessing headwinds over the last few quarters, driven partly by oversupply of panels, prices have seen some respite on account of some short-term factors. For instance, demand from the U.S. is up, as developers have been accelerating projects as they look to mitigate risks relating to the “Section 201” trade case, which could impose a price floor on solar imports to the country. Demand in Europe has also been higher on account of seasonality. While SunPower typically sells its production many months in advance, the current trends could nevertheless benefit the company.
SunPower’s stock saw a big sell off, falling by almost 20% since its earnings release, after it cut the upper end of its full year guidance. The company projected non-GAAP revenues of between $2.1 billion to $2.3 billion, versus an earlier estimate of $2.1 billion to $2.6 billion, on account of some permitting delays at its Mexican project. However, we do not see this as a significant concern, as this will only result in a project delay, with the remaining revenue recognition being potentially pushed to 2018. In other words, the basic demand picture still remains the same.
SunPower Is Focusing On Creating A Niche For Itself
While SunPower has always focused on high-end solar products, the company is tweaking its strategy to cater to a maturing solar market that is increasingly dominated by commodity products from Chinese manufacturers. For instance, the company is skewing its production mix away from its low-margin E-Series modules to its high-end X-Series modules, which offer 22%+ efficiency. The company is also focusing on pre-engineered solutions for the residential, commercial and utility space, while reducing its exposure to the self-development of utility scale solar projects, in a move that should reduce risks and capital requirements. SunPower noted that its Equinox integrated residential solution accounted for 85% of its second quarter bookings, with the solutions business garnering about 250 MW of booking or contracts during the quarter.
SunPower is also eyeing opportunities in the low end of the market with its P-Series product, which utilizes mass-market multi-crystalline solar cells with a differentiated connection technology that helps to improve performance. The company intends to set up about 5 GW of P-Series capacity via a joint venture – it will be a minority owner – in China (related: How SunPower’s 5 GW Chinese Joint Venture Can Add Value).
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