As interest in solar power has increased this fall, SunPower (NASDAQ:SPWR) stock has become a hot item.
Piper Sandlin has an “overweight” rating on it, saying operating cash flow will soon become free cash flow. Its new structure should enhance shareholder value, writes the InvestingHobo. Others just say give it a second look.
Here is that second look.
SunPower opened for trade Oct. 12 at about $17.70 per share. That’s a market cap of almost $3 billion on what should be $1.9 billion of revenue this year. While all solar shares are up, those of SunPower have outperformed rivals like First Solar (NASDAQ:FSLR) and Canadian Solar (NASDAQ:CSIQ).
Time to ask why.
The New SunPower
SunPower had been a vertically integrated supplier of solar panels and services for both residential and utility markets. Today it’s none of that. Today it’s a re-seller of Chinese-made solar panels and an arbitrageur of the energy they produce.
The decision was taken a year ago to spin-out manufacturing to a Chinese partner, Tianjin Zhonghuan Semiconductor, under the name Maxeon Solar Technologies (NASDAQ:MAXN). The Chinese partner put nearly $300 million into Maxeon, which now has manufacturing in Malaysia, Mexico, the Philippines, and France. Maxeon, in turn, has an exclusive deal to supply SunPower with panels. Maxeon’s market cap on Oct. 12 was about $600 million.
All this is being blessed by Total SE (NYSE:TOT), the French oil company that has been SunPower’s dominant shareholder since 2011. Total originally invested in SunPower at $23.25 per share. That investment is still underwater. But Total believed in this deal so much it increased its stake, buying 676,000 shares for $31 million, or $45.85/share.
The Problem of Efficiency
Why have Total, and so many others, lost money in solar while its share of the electricity market has risen?
It’s in the nature of the beast. Solar panels are a product of electronics manufacturing. Their costs keep coming down, every year. This is a good thing because it makes them cheaper. But it’s a bad thing if you’re selling them as capital goods. The value of that underlying asset is constantly declining.
That’s still SunPower’s business.
SunPower sells its panels through complex solar leases. It just got more capital for that, through Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) and others. The idea is that a solar lease finances the panels and homeowners buy electricity. Sunpower now includes its batteries, called SunVault, in these deals.
But if the value of your asset is constantly declining you’ve basically got a swimming pool on your roof. Pools are notorious for seeming to add value to a home, but not actually doing it. It’s for the same reason: they depreciate.
The right way to do solar is to buy panels, write them down quickly, then get new more efficient panels. That’s not the way the business works. The depreciation schedules now go all the way to the end of the panels’ useful life.
The Bottom Line
Analysts, seeing the likelihood of a Joe Biden win, are busy upgrading stocks like SunPower. Morgan Stanley (NYSE:MS) analyst Stephen Byrd has recently doubled his price target, although the stock is already well above it. Zacks rates the shares a “strong buy” despite a recent move of 21%, based on earnings.
But SunPower today is a financing and power sales company. If you want to buy a solar panel company, you buy Maxeon. But Maxeon isn’t a domestic supplier, so maybe you buy Enphase Energy (NASDAQ:ENPH). Enphase is supplying inverters to Maxeon, turning the DC power they generate into AC power for the grid.
If the Biden administration wants to subsidize U.S. production of solar panels, it’s going to need another horse.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
