SunPower Stock Up More Than 2x Since March: Overvalued?

by Trefis Team
-39.44%
Downside
17.52
Market
10.61
Trefis
SPWR
SunPower
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After a 3x rise since its low in March, at the current price of around $10 per share (as markets closed on 17th September) we believe SunPower stock (NASDAQ: SPWR) has reached its near term potential. The stock has crossed the level it was at before the drop in March, but in reality, demand and revenues will likely be affected this year. SunPower stock has already rallied from $3 to over $10 off the recent bottom compared to the S&P which moved 50%.

Further, SunPower stock is up about 17% from levels seen at the end of 2017, over 2.5 years ago. This rise came despite an unchanged revenue per share (RPS), as a 4% rise in revenue was canceled out by a 4% rise in the outstanding share count.

Further, its P/S multiple saw a decrease from 0.7x in 2017 to 0.6x in 2019, but has risen to around 0.8x currently, as the company is expected to benefit from the new, more efficient A-series panels which should boost the company’s margins, as is evident from the company’s Q2 earnings in June (gross margins at 6.1% vs 4.5% for the same period in 2019). However, we believe the stock is unlikely to see significant upside after the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 17% Change in SunPower Stock between 2017 and now? has the underlying numbers.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus has meant there is expected to be a drop in consumer spending, and despite the growing need of switching to cleaner sources of energy, solar installations are just not a priority for many people during this pandemic. The effect of this on SunPower’s business is evident from their Q2 2020 earnings, where revenue came in at $353 million, down substantially from $436 million for the same period in 2019. Further, a drop in other income and a rise in SG&A expenses as a % of revenue, led to net income dropping from $110 million to $18.4 million. We expect the trend in revenue to continue into 2H 2020, as demand for solar installations struggles to get back to pre-Covid levels.

If there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S decline from the current level of 0.8x to around 0.7x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $9.

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