SunPower Is a Semi - It Deserves to Be Valued Like One 32 comments
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SunPower (SPWR) is on a roll. Revenues for Q2-2008 were $383 Million - up 120% yoy. Guidance for 2009 was excellent, I think that SPWR's management is excellent, and their products are the best in the industry. Until someone comes up with a cheap multi-junction solar cell, SPWR will be the top dog for cell efficiency - a measure of how much of the sun's energy can be converted to electricity. SPWR depends on polysilicon to make their solar cells - in other words, their technology is mainstream - the only differentiator are the dyes used in processing - while that is interesting for a guy who designed chips for a decade and was issued four patents, that is a discussion for another day.
Let me get to the point. SunPower is a semiconductor company. They use semiconductor technology, processing to manufacture their solar cells, and ultimately will be valued like semiconductor companies are. So, let us analyze SPWR like a semiconductor company.
As a semiconductor company, they are very richly valued at 5 to 6x sales. Do their gross margins justify such a rich valuation ? Absolutely not. Let's look at some numbers. SPWR's gross margins are about 20%. Intel (INTC), Broadcom (BRCM) and Texas Instruments (TXN) are at around 54% gross margins - but BRCM is fabless. Note that traditional semiconductor companies are not affected by government subsidies, and coal, natural gas and oil prices to the extent that SPWR is but these are not a big deal for a cutting-edge semiconductor company with a defensible technology that is either patent protected or hard to duplicate.
But that is not the case with SPWR. The technology to produce poly based solar cells is [in my eyes] primitive. So primitive that there are one hundred and seventy chinese companies coming online in the next year and a half. SPWR charges a premium for their solar cells that are a few percent more efficient than the ones made by SunTech (STP) or Yingli Green (YGE). And the kicker that brought SPWR down from the triple digits: Spain can't afford their huge solar subsidies for much longer [which have been the driving force behind the adoption of PV in Europe].
In short:
1. SPWR is a semiconductor company that has fabs [not fabless].
2. Has lousy gross margins for a semiconductor company.
3. Are subject to more vagaries of the market than traditional semiconductor companies like...
a. Subsidies in Spain, Germany and the USA
b. Oil prices [and nat gas and coal]
4. Is not made using very sophisticated technology that prevents the competition from getting into the business.
5. A gazillion chinese companies will make this a commodity business in under two years.
The bottom line: SPWR deserves to be valued like a semiconductor company with gross margins of 20%, and not much of a technological edge over its peers. That would put the stock at below $40/share. Of course more subsidies and triple digit oil will put a temporary floor on this stock's price, but it will not last for long, as I expect polysilicon prices to be much lower in the next eighteen months, which will encourage more competition at the bottom end of the PV market.
Disclosure: None
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This article has 32 comments:
Read my article comparing FSLR and SPWR here:
seekingalpha.com/artic...
Agree with Andrew here on SPWR valuation.
I know poly- and monocrystalline silicon prices will come down and WHEN they do one should be invested in the silicon PV sector. But merely waiting for them to do so might be too late, as the market might suddenly begin to recognize silicon PV's enormous potential.
Where I disagree about FSLR: a production cost/watt advantage at the moment (and for some time to come) but sales cost disadvantages.
Besides higher installation/deinstall... cost to consumer, FSLR has complex issues which in my view are not sufficiently, properly and openly adressed and/or valuated by FSLR management, mainly the raw material and potentially escalating 'sales costs' due to the module reclamation and recycling program. FSLR is a virtual monopolist and based on European Union dealings with such companies in the past could face heavy fines.
Cash flow isn't everything.
seekingalpha.com/artic...
I guess you would say this solar efficiency will be easily overcome but I have not seen any evidence of that yet. SunTech puts a lot of effort into research and they are only at 18-19 on efficiency. So far I have not seen anything showing marked improvement in solar efficiency for the China Solars. As far as manufacturing costs, Sunpower's new fab 1 gig fab in Malaysia is going to make them competitive in manufacturing costs with the Chinese players.
My real hunch though, is that this pie is going to be big enough to sustain a lot of players for the next decade.
In the semiconductor business, gross margins are everything. Higher gross margins allow companies to sport higher multiples [PE, PS]. Added to the fact that polysilicon based PV is a commodity business, SPWR has more room on the downside - even at these "beaten down" levels.
Sincerely,
Bapcha
bapcha.blogspot.com
I agree--just as there were lots of semiconductor companies in the 90's chasing the expanding PC pie. More than a few leaders then are still around and prospering...
Cypress Semiconductor owns a chunk of SPWR. Wouldn't their design/management expertise provide some advantages? Granted, CY is not considered a tier 1 player but they do have chip design knowhow.
I like gross margins - because it is one thing that is hard to "fake" using accounting techniques.
Bottom-line: Semiconductor companies with gross margins between 20 to 30% do NOT deserve premium valuations regardless of growth rate. A technological advantage [like multi-junction] will sure help, but SPWR does not have that.
Bapcha
bapcha.blogspot.com
This is strictly "your" categorization, for whatever your purpose or day-trading agenda. It is now obvious it wasn't written just to generate discussion. Using that logic, then Apple is a semiconductor company also, and its stock should automatically have the same valuation metrics as TI, AMD, ARMH, etc.
The fact is SPWR is far more than just a commodity chip company. Their mission is to become the leading system provider, encompassing more than just silicon. And the facts (PEG ratio, etc.) appear to indicate the stock is not overvalued, but perhaps undervalued when looking longer term than the next trading day. End of my participation on this "discussion" with a day-trader.
I agree. The solar industry is just soo small, even for all the company's it has and for all it's production and growth. It's a minimal amount of world energy output, below 1%, far below that even. And at our current energy crisis, were likely to pick up every energy generation form as an way to get our energy bills down again. Every bit will be needed, but even then solar has a few advantage's why especially we should use it. It can provide energy independance, it can provide lots of jobs, it can improve so much that one day it could even become the source of the majority of our energy, thus can act as a long term sollution, thus in a world where every source of energy will be needed, solar is likely one of the first to be considerd.
The US is the 800 pound gorilla in the world solar market. We have large cities in the sun belt. The LA to San Diego region is over 15 million people, and it has a very good solar profile, and it is relatively wealthy compared to most of the world, and it has very high electric rates.
Not even close. That proves either we need a completely new breakthrough on efficiency or dramatic decrease in price to prove that the solar industry is actually viable in the long run.
Subsidies need to be removed immediately so these companies can compete properly on technology and cost. There is ZERO motivation to do so now because regardless of technology or implementation -- there is an approx. 50% government subsidy to mask any shortcomings or artificially inflate profit margins.
End subsidies now -- right now...
First, all the solar companies are working very hard to reduce costs. There is a huge amount of incentive to reduce cost. They know that the game is reduce cost or die. Have you read any of SPWR annual report? It is full of cost cutting measures. They want to cut costs in half in the next few years.
Second, the solar companies are in a "chicken or egg" situation. They need higher demand and thus higher production capacity to reduce cost, but demand will not rise until the cost comes down. This is where the government needs to fill the gap, temporarily.
It is true they are trying to reduce costs. It's called cost containment and it increases IRR. Notice that hasn't lowered the price to the consumers! It is so they can make more money which I'm not against, just do it without the subsidy. They all make noise about lowering cost to the consumer but yet the numbers say just the opposite. They squawk because they know regulators won't let the gravy train go on forever so they need to make gestures like "within two years we hope to bring the installed cost down to compete with coal blah blah blah"(and yes I've read the SPWR 10/k/q)
FYI. The current price $/Wp is US $4.83. The industry has massively increased their production in MW's in the last two years and since August of 2005 the $/Wp has been increasing. Ergo, the more they make the more expensive it has become which is the antithesis of Moores Law.
Moreover, you simply don't understand the rational about removing the subsidy. The fact is solar is the most disruptive technology we as humans have seen -- maybe ever. It really can rewrite the energy paradigm because of nearly infinite availability. The PROBLEM is that it is TOO expensive. It doesn't have to be this way. It is ARTIFICIALLY high because subsidies remove the incentive to compete! Can you imagine if AMD vs Intel had their products subsidized at a approximate 50% rate. It would be a disaster! My watch would have more processing power and your average PC would cost $20,000!
Remove the subsidies. Make them compete. Watch the $/Wp plummet and watch the world embrace low cost solar! The economies of scale will be mind bending. These companies will explode in growth and value. Quit defending the provincial attitude and greed this industry traffics in. You and others are only holding solar back by agreeing with the Charlatan element that seems to, have taken the industry by storm these days. Ever wonder what happened to all those slick guys at the "best dot come ever"? Well guess no more -- they all went to work in the solar business. This you will have to trust me on...
*direct subsidies in exploration, the finding of oil/gas domestically and abroad.
*indirect subsidies by means of tax breaks.
*protecting the oil shipping lanes and/or occupying foreign nations with large fossil fuel reserves.
So Here we go:
Worldwide In MW 2009
World= 4783-6778(15.3%-63.4% Growth) =Median(60 % Bad Scenario 40% G.S =5581.0
Worldwide In MW 2008
World= 3905-4147(43.4%-52.3% Growth) =Median(50%/50%)
=4025.5
Worldwide In MW 2007
World= 2722.53
2009 Other than EU in MW
Japan 500
USA 800 - 1000
China 50 - 70
India 50 - 70
South Korea 200 - 300
Israel 30 - 50
=
1630 – 1990 (75.2%- 113.9%)
2008 Other than EU in MW
Japan 300
USA 400
China 25
India 100
South Korea 100
Israel 5
=
930 (60.6% Growth)
2007 Other than EU in MW
Japan 230
USA 259
China 20
India 20
South Korea 50
Israel 0
=
579
2009 Solar Installations in the EU (inc. SUI) in MW
Germany 2000- 2500
Spain 300-950
Italy 300-400
France 200-350
GB 5-10
Czech Rep. 50
Swiss 10 (New Solar Subsidy in place)
Portugal 40-60
Greece 100-300 (2 GW in the pipeline)
Belgium 40-50
Netherlands 8
Rest of EU 100
=
3153-4788 (if 2975 MW were installed in 2008 then 5.9%-60.9% Growth if 3217 MW were installed then -2%-48% growth)
2008 Solar Installations in the EU (inc. SUI) in MW
Germany 1600
Spain 1000-1200
Italy 120- 150
Portugal 30
France 100
Swiss 3
GB 3-5
Czech Rep. 20
Austria 4
Greece 50
Belgium 20-30
Netherlands 4
Cyprus 1
Rest of Europe 20
=
2975-3217 (38.7-50 % Growth)
2007 Solar Installations in the EU (inc. SUI) in MW
Germany 1328
Spain 640
Italy 90
Portugal 14
France 50
Swiss 2
GB 3.4
Czech Rep. 3.1
Austria 3.01
Greece 3
Belgium 2
Netherlands 2.30
Cyprus 0.72
=
2141.53
Rest of Europe 2
=
Total 2143.53
-inventory effects
-semiconductor demand
-recycling
-grams/watt (mean)
In 2009 supply (~8660 MWp) will only fall slightly short of demand (~9000 MWp) so asps should stabilize.
2010 supply (~12800 MWp)
This excludes any disruptive solar grade silicon production technologies such as RSI-silicon or 6N.
2010 demand? China (views their solar industry as a key industry) would almost certainly introduce new subsidies should demand fall off, with India a carte blanche. Brazil? USA?
Into 2010 solar industry will be free of supply constraints and the industry can really takeoff, cq play catch up with the 'lost' years.
I would like to stress Moore's law is a statistical law: deviations only average out to a doubling every 2 years, idem ito with price-performance over a longer time period.
I chose MW installed for the simple reason that all you read about, nowadays, how ASP's for PV are supposed to tumble significantly...thus eroding margins....Since, supposedly, without Spain their is not enough demand leftover to keep the ASP's at an acceptable level...But as one can see from my "chart" Worldwide growth is unstopped....Certainly growth will slow a bit...when the base gets bigger and bigger that is not an unusual phenomena...but if Grid Parity is reached around 2010-2011 demand is endless...In any case that is why I chose MW installed...
Additionally you bring a valid to the surface...I mean why is it alright to subsidize oil and gas in the US but subsidies for renewables are just the devil????Ill tell you why...some have more dollars left over for lobbying than others....But what one doesn't take into account...Is what happens to energy prices when you start trading CO2 emission certificates...because that will be added to the cost of energy....Because with those certificates we are actually quiet a bit closer to grid parity then one would expect...So this is another point one should seriously incorporate into his/her consideration of the future of PV and renewables in general....Because once companies pay for polluting things aren't that easy anymore just ask RWE (German based power company) scrambling to get rid of some of their coal plants or adding renewables to the portfolio in order not pay such a high CO2 bill....with kind regards from Germany CW
The reason there are subsidies for coal, oil and nat gas, the fossil fuels that you guys think are the evil, is that they currently work well and the world would without them. Not so with solar. Solar is not a complete renewable source as even wind is. The technology is expensive and as a power source has limited power production capabilities. It is much the same way that ethanol has become a bust.
As far as comparing it to Intel and the chip industry, their valuations and stock went up because with every year they are able to improve the technology. Poly solar panels have become stagnant. There have not been any major improvements in efficiency, or at the rate which the chip companies are improving their products. Also the top of the line chipsets have maintained their prices for the most part, so if you equate that to solar, the panels will stay expensive or increase in price with each major improvement in efficiency.
You also base this scenario of increased installations with grid parity. Grid parity will never be reached. The reason is that the majority of the world's electricity is produced with coal, natgas, and nukes. These sources for the most part are controlled by stable countries, not where oil is produced. Oil can go to $500 a barrel and should have no impact on the cost of electricity, which many people seem to equate the two.
SPWR will also have a large portion of shares sold by Cypress, not good for the price of the stock. FSLR produces inefficient thin film. Cheaper than poly but very inefficient.
My point was the Demand will be out their next year...and ASP will fall but not as significantly as expected...And the future will tell if we reach grid parity or not...You made your case based on subsidies working well for natural fuels....And saying subsidies for solar do not.....who says subsidies for solar do not work?
In Germany(where I live) we spent the most amount of money on subsidies on the planet and we are quiet happy with them...The average German actually gladly pays a premium for energy if it is clean(wind, solar etc.) compared to coal, gas, and nuclear (yes nuclear doesn't produce CO2 but nuclear waste seems to be quiet an issue if I may point that out)....So you just say subsidies work for fossil fuels and not for renewables based on basically nothing....I can tell you it works and I am happy paying a little premium on the electricity price....In the future we are not as reliant on power and building a solar industry that is creating a significant amount of jobs and solar companies that pay a good chunk of taxes(Though I guess we dish them out again for the subsidies but I think it is beneficial as whole to Germany and the planet)
Furthermore you compare solar to Ethanol....They are not comparable IMO...Solar is here to stay...why do you think the big boys are coming in....Intel for example has entered the industry or GE....The achievable cost reductions are quiet big...Poly for example is the main cost of a panel at the moment …(besides FSLR and a few others)...But with more and more supply hitting the market this will change...and these are not the only cost reductions you can achieve take for example FSLR....they increased their throughput by 5% in one quarter!!! Also there are technologies such as UMG, Pluto, Quad, etc. that can differentiate a stock by leading to faster cost reductions...So to conclude I do not think you are right solar subsidies do not work and solar will achieve grid parity it is just a matter of time….With kind regards from Germany CW
Long ABX, AUY, CSIQ, ESLR, SSL, TSL
The price of nat gas is directly linked to oil. Coal (and therefore electricity) is indirectly linked in that coal is mined and transported with petroleum products. Then the coal has to be comminuted (almost 40% of world energy is spent on comminution). Besides the whole CO2 issue, the healthcare, medicare costs associated with coal burning (mercury, thorium, plutonium, uranium emmissions) are soaring. Then the electr. has to be transported (with losses) to your house.
Solar doesnt have any of these disadvantages and the solar industry will overtake/merge the semiconductor industry, will overtake the automobile industry etc... Even Bush has solar panels, in fact his ranch is off grid. These people only take care of themselves, dont be fooled. They know the old economy (oil, coal) is collapsing under its own weight.
yes, Germany has the luxury of being around a lot longer than the US and so has become compacent and their populace has reached "parity" which means you can all enjoy a good standard of living while your government subsidises your way of life. Your past governments have never adopted a democratic, capitalistic governmance. Left to your own, Europe was not the peaceful area it is now. The last two world wars were fought in Europe and it took democracy and for the most part the US to bring peace and your way of life. So I say your welcome although you probably despise the thought of thanking the US for your present way of life.
The US is not a socialist country and for the most part the majority don't want to go that route. Germany is the size of let's say New York and New Jersey. Sure, intracountry transportation costs are contained. Your populace also live very close to where you work. The US is the direct opposite. Very large country and the major city areas happen to be thousands of miles away. Also, for some reason, we have adopted "suburbia" as a way to live very far away from where we work. Transportation in pour country is much more involved than in Germany, or any other individual European Country. Solar, although feasable, will not work because it isn't as efficient as lets say even wind at this point. In the future, it may be, but in it's present state, noway are city areas going to use acres worth hundreds of millions of dollars (even with our broken real estate) be used for panels to power a handful of homes. It won't happen. If the euro continues to lose value to the dollar, look for further cuts in subsidies and installations as it will get more expensive. The greenback is primed for a rebound and this doesn't bode well for new solar installations.
To aquaculture. Nat gas and coal are completely independent of oil. We produce our own coal and nat gas and the US exports these fossil fuels. Traders may make the price of Nat gas and coal move higher as other fuels increase, but it is a false increase and will correct as it has now. Oil thaough is for the most part produced in the most violent, hostile and unpredictable areas in the world. So look for oil to continue it's rise while our home grown fuels stay stable.
Ypou are correct in that Bush has solar panels in his ranch while the Green poster boy Gore uses so much fossil fuels, that by curtialing Gore, we could reverse global warming (just joking) What a farce that this idiot was given a nobel peace prize when someone much more deserving like Irena Sendler should have been chosen, not some trumped up slide show that the presenter himself has no interest whatsoever to follow what he preaches.
Another thing about nuclear power. It is safe and has minimal "waste." It is a big media scare and misinformation that has caused the stigma on this very efficient and useful mode of power. I won't get into it, but just do a search on the truth about energy sources and you can make your own opinion.
With warm regards from NY
Coal imports from Canada virtually cancel out any exports to Europe (because of low dollar value). Net exports from US only 1.9% of production in 2007.
The last nuclear plant in US took 30 years to build&license. If people dont want a windmill in their backyard, what would you expect from a nuclearplant, complete with mandatory evacuation plans?
how else can you explain nat gas going up in the summer months, especially when there weren't any storms in the Gulf? Also with coal, we produce and use most of our coal, and export to China, moreso than Europe. Coal and nat gas went up in sympathy with oil, that now as you can see is breaking it's bubble.
You are correct in that nukes are viewed as bad, but a good public relations firm can make these gullable greenies want one in their back yard. It is all about perception. Seriously though, nuclear is very clean and safe. Look at all the nuclear powered military ships. Guess what, they also carry more bombs. If it was as unsafe as people percieve it to be, there would have been accidents and I truly don't believe our military would use this type of power.
Did anyone catch the Akeena's earnings? Dismal and they are installers. Goes to show that if the EU keeps cutting, these solar companies are due for a drastic downturn because the retail installations are not being done, and rightfully so.
Blaming fossil fuel price increases on traders would be a new economic theory. Publish it on SA: you might win a Nobel prize.
Who cares about installers: its an A/C electricians union conspiracy anyway.
Everyone knows high volt A/C is associated with the 'old economy'.
Solar hot water will 'power' future washers etc and the building standard code will go to easy, safe, do-it-yourself-low-vol... with LED lights,DC motors etc. etc. IT is allready D/C.
I hope you didn't supershort LDK before earnings. (net up 90% quarter over quarter, 25% margins) stock up 20% after hours.
learning curve rate (% various electr. production):
Hydroelectr. 1.4
Nuclear 5.8
Coal 7.6
Gas(turbines) 13
Wind 17
Photovoltaics 20 (data from over 35 years: an exceptionally stable number and is in line with computers)
In case you don't know what this means: a 20% reduction in costs/watt with every doubling in cumulative solar silicon output (every two years).
While a design change (improvement) to a nuclear power plant can take a decade or more to manifest itself, solar manufacturers can do this in weeks. As a result PV technology will go through hundreds of design revisions in the time it takes coal or nuclear plants to go through one.
BTW, this summer solar electr is 6 cents cheaper than peak grid rates in most parts of California.
In june this year a nuclear reactor was shut down at Indian River because a new CAMERA interfered with pumps supplying water to four turbines. Now that sounds real safe doesnt it?
So to conclude this blog: yes silicon solar technology is an information technology but it deserves higher valuation, partly because it has a lot of catching up to do, powering all those chips.
Best of luck to you- thanks for the informative post.