Company Overview: SunPower Corporation (NASDAQ: SPWR) is a leader in distributed energy generation in the US with smart energy solutions. The company caters to the US and Canada with solar modules integrated with storage and smart energy software, solar panels embedded with micro-inverters, and roofing systems. It sells to residential customers and commercial & industrial establishments. Of the total sales in FY20, residential and light commercial products accounted for ~75%. While the commercial and industrial segment constituted ~23%. SPWR provides engineering, procurement and construction services, and sales of energy under long-term power purchase agreements to commercial establishments. The company’s SunVault storage solution is tailored for residential customers providing seamless backup during power outages.

SPWR Details

The Strength in ‘Power-of-One’: SunPower saw increased adoption for all-in-one energy systems with financing programs. The integrated system includes a full suite of solar power systems (SunPower Equinox and SunPower Helix), storage solution (SunVault), roofing system (OneRoof), and software and services catered for residential and light commercial use. SPWR is expecting the all-in-one integrated system to provide a $250 billion market opportunity. Through low-cost loans and lease financing support, SPWR expects to see an increased shift in the mix to the integrated systems reaching 65% in residential installations in Q4 FY21 (from 50% in Q4 FY20). It had created a $0.46/W value addition to residential customers in Q4 FY20 and is projected to reach $0.65-0.82/W in Q4 FY21.

Figure 1. Increase in Residential Value Creation:

Source: Company Reports

Market Opportunity for Energy Storage Systems: The integration of storage into solar energy systems is expected to drive the market. The company has SunVault Battery and Hub+ products designed to store excess energy production and seamlessly transition home from grid power to battery power. SPWR witnessed attach rates of these products increased over 20% in FY20. It has about 180MW backlogs for residential installation. The company planned to expand dealership from the current eight to over 20 and was awarded contracts for nine new home installation. The SunVault provides peak energy output of 13kWh. SPWR is expecting a 190 GW market opportunity for energy storage systems by 2050.

Figure 2. Potential Market Opportunity for Products:

Source: Company Reports

Growth Strategy in Commercial and Industrial Segment: SunPower is one of the leading commercial solar provider in the US, with 8 out of 10 top solar users choose SunPower products. It aims to strengthen its position in behind-the-meter storage and community solar markets. SPWR received over 275MW new contracts and over 90MW secured for community solar. Attachment rates are expected to grow over 30% for SunVault for commercial and industrial use. It has ~18 MWh of projects with a commercial operation date in 2020. It seeks to expand to front-the-meter storage with a potential investment of $125 billion required in the next 30 years.

Figure 3. Expansion Plans in Commercial and Industrial Segment:

Source: Company Reports

Historical Financial Trend:

Residential installation continues to dominate the revenues that benefited from integrated product lines. Through lower unit costs and higher energy efficiency, the company able to increase the residential value creation to customers (to $0.46/W). SunPower has a total customer base of about 351,000 in FY20. Share of commercial and industrial applications has been upward trending in the past three years, aided by flexible financing programs (like sale-leaseback, etc.) and wider reach in behind-the-meter and community solar markets for energy storage. For the past three years, SunPower aligned its businesses to focus on solar energy systems. It had sold-off operations and maintenance business for utility-scale solar PV in FY20. In addition, SunPower spun off its Maxeon Solar Technologies, Ltd. On a sequential basis, SunPower realized a higher gross margin from $0.34/W in Q3 FY20 to $0.50/W in Q4 FY20 (vs. $0.45/W in Q4 FY19).  

Figure 4. 3-Year Key Financial Trend:

Source: Company Reports

The company’s Commercial & Industrial segment proved resilient with advanced bookings. An increase in EPC volumes drove the segment revenues with 5% growth in FY20 over the prior year. Residential and Light Commercial segment de-grew by 2% owing to the deconsolidation of residential lease business. SPWR was able to maintain a gross margin at 15.7% in FY20 due to cost reduction measures and better product mix. Adjusted EBITDA was lower than last year, reaching $40.0 million in FY20. However, SunPower posted a much higher net profit of $474.0 million in FY20 compared to a loss of $7.7 million in pcp aided by reduced R&D spend, lower selling and distribution costs, and reduction in severance costs towards December 2019 restructuring plan. Other income significantly increased from $130.4 million in FY19 to $660.6 million in FY20 due to gains on equity investments and divestiture of businesses.

Figure 5. FY20 Key Financial Highlights:

Source: Company Reports

Through recurring revenues and long-term PPA contracts, the company generated steady cash flows. SPWR continues to deleverage its balance sheet reaching $281 million of non-recourse debt as of January 2021. It is expecting net debt to EBITDA to reach below 2.5x in 2021. As of January 2021, SunPower had a cash balance of $232.8 million. However, this may seem inadequate to meet the 2021 commitments of $487.7 million. But the company frequently unlocks cash through the sale of non-core assets and investments.

Top 10 Shareholders: The top 10 shareholders together form ~79.91% of the total shareholding. Total SE and The Vanguard Group, Inc. are holding a maximum stake in the company at 53.39% and 5.67%, respectively.

Figure 6. Top 10 Shareholders

Key Metrics: SPWR showed a decline in EBITDA Margin in FY20 owing to the accounting treatment for deconsolidation. Its profitability was supported by an increase in residential value creation, steady recurring revenues, lower R&D and general expenses. A surge in investment gains lifted the ROIC in FY20. The current ratio broadly remained stable, aided by long-term contracts, while the cash cycle was disturbed in FY20.

Figure 7. Key Financial Metrics

Profitability Metrics and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: SunPower is expecting an increased revenue mix from the residential segment with a larger proportion of revenues from ‘all-in-one’ energy systems through financing arrangements. It has a recurring revenue pipeline of ~$637 million in FY20. The company projects FY21 revenue growth of 35%, and the trend likely to continue in FY22. An increase in the targeted market for installation in new homes, behind-the-meter, and community storage expansion are some drivers. The increase in residential value creation to drive an EBITDA growth of 3x in FY21 and over 40% in FY22. The company is well-positioned to foray into front-the-meter energy storage requirements.

Figure 8. FY21 Priorities:

Source: Company Reports

Key Risks: The company is gradually increasing its receivables exposures supporting leasing and financing arrangements to consumers. It may increase the risk of defaults and erode profitability and balance sheet quality. SPWR relies on Maxeon Solar Technologies for procuring solar panels and modules, etc., through supply agreements. Reliance on a single source of supply exposes supply risk and distort price negotiations. Feed-in tariffs and net metering credits by the federal government drives the demand for residential solar installation. Changes in regulations largely affect revenue growth. SunPower has sizeable contractual commitments (mostly convertible debt) that are coming due in 2022. Delay in the sale of non-core assets or deferrals in fundraising plans may significantly affect the ability to service obligations.  

Valuation Methodology: EV to Sales Multiple Based Relative Valuation (Illustrative)

EV to Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: SPWR has delivered 3-month and 6-month returns of ~-4.89% and ~+70.70%, respectively. The stock is trading below the average of the 52-week high price of $57.52 and 52-week low price of $6.00, implying an accumulation opportunity. On the technical front, the stock has a support level of ~ US $24.592 and a resistance level of ~US $29.649. We have valued the stock using EV to Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) considering its growth strategies for residential installation, leadership position in commercial and industrial installation of solar systems and expansion in behind-the-meter and community solar storage requirements. For this purpose, we have taken peers such as AMETEK Inc. (NYSE: AME), Romeo Power Inc. (NYSE: RMO), Flux Power Holdings Inc. (NASDAQ: FLUX), to name a few. Considering its scalability in integrated energy systems, order backlogs for energy storage installation, cash flows and liquidity, we give a “Buy” recommendation on the stock at the current market price of US $28.20, down 5.08% on April 12, 2021.

SPWR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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