Is Cypress's Core Worth Less Than Nothing?

Thanks to the market’s ongoing infatuation with solar stocks, the current valuation of Cypress Semiconductor (CY) has taken a weird, illogical twist.

Cypress owns a 53%-stake in Sunpower (SPWR), which makes solar cells and panels. The current Sunpower valuation is $12 billion; the stock is down today but has more than doubled in value since late August. That puts the value of the Cypress stake in Sunpower at $6.4 billion. The thing is this: Cypress itself has a valuation of about $6 billion. The implication: core Cypress is worth negative $400 million.

This seems a bit off, I would say. John Pitzer, an analyst with Credit Suisse, asserts in a research note today that as a stand-alone business free of its Sunpower stake Cypress would likely be worth about $2 billion.

Now, to be clear, Pitzer also notes that for tax reasons any liquidity event involving the Sunpower stake is unlikely to happen until after November 2009. So in calculating the value of the stake to Cypress, you would want to apply some discount. But this big a discount?

Meanwhile, Pitzer also notes that Cypress Thursday will meet with analysts at its headquarters in San Jose. Sunpower met with analysts Tuesday in Berkeley. Pitzer’s colleague Satya Kumar Wednesday raised his price target on Sunpower to $165 from $110, and repeated his Outperform rating, though he notes that “the company did not add a ton of new information” to what was known about the company going into the meeting. Kumar also says that “tactically” he prefers First Solar (FSLR) here over SPWR.

Cypress Wednesday is off 70 cents, or 1.8%, at $38.69; Sunpower is down $5.46, or 3.7%, at $144.10. First Solar today is up 68 cents, at $169.68.

CY vs SPWR 1-yr chart

Comments

[VirtualOptics:]

This is quite a revelation, for I found both SunPower and Cypress Semi were listed high in the Vectorvest compilation and so took a position in each. Little did I know I had bought SPWR twice. With CY owning a major portion of SPWR, could a merger be in the offing?

2007 Nov 07 04:11 PM

[solar jim:]

A merger isn't in the cards for these two. CY spun off SPWR through an IPO in 2005. It is doubtful that CY would spend money to reacquire a company they previously owned. It is also doubtful that SPWR would acquire CY as they are not solar related. The CEO of CY, Rodgers, sits on SPWR's board of directors. While it is possible, in theory, I would think it is very unlikely that the two of them would merge.

2007 Nov 07 09:48 PM