SunPower (NASDAQ:SPWR) is the second largest solar panel manufacturer in the US. It is a vertically integrated solar energy business. The company consistently beat the analyst earnings estimates in the year 2013 and valuations have increased almost 450% in the last 52-weeks. However, for the last month or so, the stock has started following a slight downward trend and recorded a decline of around 5.5% since the start of November. The investors, in general, are getting alarmed by the whole situation and there is a sense of caution among them regarding SunPower and the solar industry. We will address this issue by analyzing the current position of the company and the future events that may affect its valuations.
Potential Reasons For Decline
SunPower is facing capacity issues, as it is has been running on full capacity recently and there is no margin for growth if the company does not take steps to expand. Operating on full capacity means that other industry players, like First Solar (NASDAQ:FSLR), will have the opportunity to capitalize on a relatively larger share of the industry's growth than SunPower. SunPower produced around 1-1.3 GW of solar panels in 2013 and it plans to add an additional 300MW in 2014. The capacity limitation is the main reason behind the investor's declining confidence in SunPower. In reference to this capacity issue, it must be noted that the company announced its plan to build a factory in Philippines which would add around 350MW. The plant will be operational in 2015. Lack of production capacity is definitely an issue but only in the short term and it should not worry long term investors. The revenues generated from the rooftop projects will help the company sustain its earnings in 2014. After that the capacity issue will be resolved and the company can be expected to grow.
Short Term Materialization
After the news of capacity issues, some investors sold to materialize their gains and spurred the declining trend in the valuations. The negative sentiment in the market has caused the price to decline but is it justified?
IHS predicted a 17% growth in PV installations during 2014 and BNEF projects a 20% increase in PV installations by 2017. The industry does have growth prospects as the EIA (Energy Information Administration) predicts that photo-voltaic will grow 11.6 percent a year through 2040. Moreover, GTM predicts that the US installation capacity will surpass Germany's in the fourth quarter of 2013. This certainly tells us that scrapping the whole industry by a short opinion is not right. The Solar industry does have growth prospects and companies like First Solar and SunPower will capitalize on this growth.
As far as the growth of SunPower is concerned, the management is hopeful to achieve a 100% increase in its customer base by 2015. Moreover, the management expects contracted cash flows to reach $2 billion, across 5 countries, by 2015. The company will also raise $3 billion in capital by 2015. The amounts of contracted cash flows and capital raised in 2012 were $600 million and $500 million respectively. This indicates the company's ability to grow in the future. Overall, the industry is growing and even though SunPower may not secure the top place, it is poised to achieve substantial revenue gains in the coming years.
Cell Efficiency And The Rooftop Market
The company offers Maxeon solar cells which are silicon based and the most efficient commercially available cells to date. They achieve a modular efficiency of around 22% while the commodity cell is only 15% to 17% efficient. The thin cell technology offered by First Solar generates up to 14% modular efficiency. This is a clear competitive advantage for SunPower. The rooftop systems have an area limitation, hence high-efficiency cells are given preference over less efficient cells to generate more watts per a given area. The energy per rated watt of Maxeon cells is around 8% higher than C-Si panels and around 9% higher than a thin film cell. Cell degradation is around 0.25% p.a., as compared to the 1.3% p.a. of a commodity cell. One might argue that the solar cells offered by SunPower are expensive as their manufacturing cost is around $0.90-$1 per watt, while the commodity cells are very cheap and the competitive advantage is lost. Yes, the cells are expensive but when we see the overall costs of installing the rooftop systems, the difference in the system cost is not very high; so the efficient cells are preferred over commodity cells. The LCOE (Levelized Cost Of Electricity) of Maxeon is $0.14/KWh as compared to $0.15/KWh of a commodity cell. This indicates that despite the high cost per watt, the overall cost of SunPower's system is actually a bit lower than the commodity cells and it has an added advantage of dense wattage per area unit. So, SunPower's rooftop systems are more competitive in terms of performance and LCOE. This will assist the company to win even more rooftop contracts in the future.
Companies like SolarCity (NASDAQ:SCTY) and First Solar are also competing in the US solar industry. First Solar is involved in developing utility scale projects in which its cells are rather more suitable because of their cost and performance at high temperatures. Besides that, the company has entered the C-Si cell market and is planning on launching TetraSun; a cell that is 20% efficient and costs around 60 cents/watt. This development is a threat to SunPower's dominating market share in rooftop because TetraSun lowers the efficiency gap and outperforms Maxeon in the cost department.
SolarCity, on the other hand, has successfully securitized some of its rooftop projects and raised around $54 million. The securitization has opened new ways for rooftop financing and there will be less pressure on cash as a result of rooftop installation costs. By gaining access to low cost financing, SolarCity also poses a threat to SunPower in the rooftop market.
Overall, the launch of TetraSun by First Solar and the asset securitization by SolarCity are worrying developments for SunPower given their current stalled capacity. The competition is about to intensify in the rooftop market. However, SunPower is also working on increasing efficiency and decreasing costs per watt. So, the increased competition will accelerate R&D and bring more attractive power lease contracts for consumers; thereby triggering further growth of the rooftop solar market. We believe SunPower is positioned to capitalize on this growth because its offerings are highly competitive in nature. For instance, SunPower is offering power leases at around $0.18/ KWh as compared to $0.21/KWh offered by Utility Power Supply.
Total S.A. was recently awarded a major solar project in South Africa. SunPower will provide photo voltaic specifications along with engineering, procurement and construction (NYSE:EPC) services and long-term operation and maintenance for the project. This is an 86MWp project and expected to generate approximately 210 GWh of power each year, which represents the electricity consumption of 45,000 South Africans.
SunPower acquired Greenbotics, a California based company that offers panel cleaning products and services for large-scale solar power plants. With this acquisition, the company expands its services portfolio and will now serve the markets which have high rates of dirt and dust accumulation. Regularly cleaning solar panels located in dry, dusty regions can increase the annual energy production by up to 15%. This is a substantial efficiency gain and an incentive for the customer to use cleaning services. This acquisition will serve SunPower in supplementing its revenue through services provision.
SunPower is currently operating at full capacity; First Solar and SolarCity can exploit this capacity limitation. However, the company is working on a new plant that will be operational in 2015. First Solar's new TetraSun panel is expected in mid-2014. So, there will be time for First Solar to capture the market before SunPower increases its capacity. However, SunPower's current offerings are very competitive even compared to TetraSun. Hence, SunPower will not lose any substantial market share in 2014. Attractive lease offerings also point toward a strong performance by SunPower in the near future. We believe that SunPower will continue to dominate the rooftop market while First Solar will gain ground in utility scale projects. Nonetheless, SunPower is also initializing new utility scale projects and extending its services portfolio. The discussion above shows that future of SunPower remains bright and investor fears are misplaced. Therefore, we maintain our 'BUY' recommendation on SunPower.
Additional disclosure: Equity Flux is a team of analysts. This article was written by our Technology analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.