AmTech Research alternative energy analyst David Edwards initiated coverage on SunPower with a "Hold" rating. SunPower's business is described in detail in its S-1 filing. Excerpts from Mr. Edwards' report:
SolarMarket Poised for Growth. Solar is proving to be a key technology in the move towards distributed generation – power production on site rather than at a central power station. With retail utility prices increasing and continued supply disruptions from black-outs, storms, etc., we believe that interest in self-generation will remain high. In both the corporate and residential markets, government subsidies make solar power generationa smart economic choice in several large markets (Germany, Japan and parts of theU.S.). Today, strong demand exceeds supply, and we believe this supply/demand imbalance will continue for the foreseeable future.
Environmental and Security Concerns are Driving Non-oil-Based Solutions. From state Attorney Generals suing power companies for acid rain pollution to international treaties like the Kyoto Protocol, environmental concerns are finally driving the market towards solutions that limit pollution. And, in Europe and North America, governments are focusing on opportunitiestoreducerelianceonimportedoil fromtheMiddleEast. While solar use has limited correlation to oil consumption, it is seen as part of a portfolio of solutions to help wean economies off of oil.
SunPower Has the Highest Efficiency in the Market. SunPower's claim to fame is its high cell efficiency which produces 50% more energy per square inch of cell. In a silicon constrained market, we believe it is important to focus on silicon usage efficiency in the near-term. Long-term we believe that SunPower's kWh/square inch advantage will prove to be a market differentiator.
Vertically integrated. SunPower is a vertically integrated company that produces cells, modules and inverters (through a partnership with PV Powered). While the industry may evolve to best-of-breed companies focused on each part of the manufacturing process, we believe that an integrated manufacturing approach isthebest strategy at this stage of the market.
Some Downside Risk. While we believe that the supply constraint in the market limits downside risk, SunPower's silicon supply issues present a significant risk to revenue and cost. We know that some solar manufacturers are not operating at full efficiency since they cannot get enough silicon. If SunPower has difficulty in acquiring silicon, the company's revenue may not meet our forecasts. Note that we are assuming that SunPower will be operating at 90% of capacity in 2006 to account for some limitation from silicon supply.
Based on the IPO pricing and initial few days of trading, one has to assume that investors have high hopes for SunPower. While we also have high hopes for SunPower, we believe that the value is currently priced into the stock. In assessing valuation, we have looked at both near-term and long-term P/S and P/E ratios. Using the same time frame as we have for Evergreen Solar, we believe that SunPower could trade at $40+ in 2008, a 33x multiple against earnings in the $1.20 range in 2009. Using a 25% discount, we believe that SunPower could be trading around $30 in the next 1-2 years. We believe the biggest risk to us sitting on the side lines now is that we are being too conservative in our revenue and profitability estimates. Given that SunPower has significant expansion risks and that the company has yet to disclose much forward looking information, we would rather err on the conservative side and wait to put new money to work. We could see changing our opinion if the stock pulls back to the low $20s, at which price investors could expect a better long-term return. For now, we continue to advise investors to buy Cypress Semiconductor, especially now that investors get over$8 of SunPower value with each CY share.