SunPower: revenue stable after spin-off with Maxeon (NASDAQ: SPWR)

Ahead of its analyst day on March 31, 2022, leading solar and energy service provider, SunPower Corporation (SPWR) plans to update investors on investments to improve the company’s customer services, particularly on the domestic solar front. Companies like Sunrun Inc. (RUN) and Sunnova Energy (NOVA) reportedly lost a combined $500 million in the first nine months of 2021. They used around $1.3 billion in cash in their operations in due to the rapid growth of solar installations. By the end of 2021, US home solar installations were expected to increase by more than 7% as the effect of the pandemic continued to wane. In addition, the Russian invasion of Ukraine has caused the price of crude oil and Brent oil to jump by more than 40% in the last 3 months.

Thesis

SunPower is still a buy despite the weather and COVID-19 challenges of 2020 and 2021 that sent the stock down 43.53% in the year-over-year price return analysis. For me, the exit of the business from light commerce, including the manufacture of solar panels by splitting with Maxeon Solar Technologies (MAXN) is a complement for the reintegration of the company. In addition, SunPower’s transformation into a renewable energy company focused on residential customers will be strategic for its long-term growth.

The Maxeon split

It’s no surprise that SunPower has diverged from solar panel manufacturing and instead focused on solar power distribution. Tianjin Zhonghuan Semiconductor (TZS) made possible the split with Maxeon Solar in the second quarter of 2020 by investing $298 million in the deal.

Since January 2021 (after the spin-off with Maxeon in August 2020), SunPower’s revenue increased by $198.7 million or 17.67%. Gross margin also increased by 32.14% while cash increased by over 111.77%. These fundamentals are impressive, but the solar energy company has yet to regain its dominance of previous years. Cash levels in January 2014 hit a high of $956.2 million, while in December 2014 revenue saw the biggest increase at $3.027 billion.

U.S. solar panel makers have had a tough time, especially after semiconductor supply issues hit the market at the onset of the COVID-19 pandemic. Ormat Technologies (ORA) is down 6.78% since March 2021 while revenue is down 5.98% in the year to December 2021.

In my list of the top five solar panel makers in the US, First Solar Inc. (FSLR) is down 8.65% over the past year, while SolarEdge Technologies (SEDG) is up 6.97% and NextEra Energy (NEE) gained 5.01% at the same time. .

With Maxeon, supply challenges in the solar industry can be minimized in the long term, especially with the entry of market leaders; TotalEnergies (TTE) and Tianjin Zhonghuan as majority shareholders. Total holds a 51.7% stake in SunPower and a 36.4% position in Maxeon.

SunPower’s intention in this spin-off is to expand its position in the North American distributed generation and storage market. In its fourth quarter 2022 earnings report, SunPower raised its 2022 EBITDA guidance to a range of $90 million to $110 million. The company, however, hinted at a $15 million reduction in guidance after selling its light commercial operations to Total.

SunPower’s deal to sell its commercial and industrial solutions business to TotalEnergies for $250 million was a tempting undertaking. In Q3 2021, SPWR lost $8 million due to C&I, and retaining that market would also prevent the company from fully divesting and focusing on the residential business.

Eyes will now be on TotalEnergies, which is looking to expand its distributed generation business in the United States. Overall, Total aims to support its B2B customers and support its sustainable development objectives (green energy). About this acquisition, Vincent Stoquart – Deputy CEO of TotalEnergies said:

This is another step in our development of renewable energy in the country, where we are aiming for 4 gigawatts of solar capacity by 2025.

Currently, TotalEnergies owns nearly 500 MW of distributed energy production. This acquisition will increase Total’s presence in the United States and help the company expand its annual capacity to more than 100 MW. With the deal expected to close in the second quarter of 2022, SunPower will use the proceeds to increase its digital offerings and reach more homeowners. The company was optimistic about increasing its investment in digital products to improve customer experience and operational efficiency.

Suffice it to say that TotalEnergies has benefited a lot from this agreement and more. In the past year, its net income has increased by more than 500%, while Maxeon’s has decreased by 18.73%, while SPWR is down by 108.73%.

Benefits for residential businesses

The Russian invasion of Ukraine also forced the Biden administration to ban the import of oil from Russia. WTI and Brent crude oil prices have gained over 40% in the last 3 months. About 700,000 barrels per day were imported from Russia by the United States in 2021, and this ban will deprive Russia of billions. Nevertheless, rising energy costs among American families will force the integration of renewable energy into residential areas.

SunPower outlined its plan to increase residential origination financing from 35% in 2021 to 45% in 2022. In doing so, the company aims to capture new fee income that was absent in previous transactions. Customers will now be able to access faster financing while helping dealers and sellers close deals faster.

This initiative is imperative given that the industry is growing at a modest pace. The residential solar market is expected to grow at a CAGR of 9.68% from 2021 to 2025. It is expected to reach $5.99 billion by 2025.

The US market is expected to make a 100% contribution with an additional growth rate of nearly 6%. In 2021, Houston-based solar giant Sunnova Energy grew its customer base by more than 81% to 195,400. That number was spread across 25 US states. The company’s residential solar power has reached 1.14 GW of generation capacity as it plans to reach 400,000 homes by the end of 2023.

After adding 13,000 customers in Q3 2021, SunPower currently has a customer base of up to 427,000 after seeing a 42% increase in Q4 2021. Residential gross margins hit a high of 20%, indicating the strength of this market. As the company enters 2022, its new home segment saw an increase of 66,000 new customers, +40% year-over-year. With the planned digital investment in 2022, adjusted EBITDA per customer (before investment) was $2,200.

SunPower’s management is also very confident about the success of the Blue Raven arm of its business. In early 2021, this retailer reported 3-year revenue growth of 268%. It was after the acquisition of Blue Raven in October 2021 that SunPower shifted its focus to residential customers. It was determined that more than 90% of Blue Raven’s customers are in 14 U.S. states where SunPower only had 5% of sales in Q3 2021. In essence, SPWR is looking to increase its presence in areas where the company had a minimal market share.

In my opinion, the transaction value of $165 million to acquire Blue Raven is affordable compared to its sale with TotalEnergies (at $250 million), the two are miles apart. Up to 1 million shares of Enphase Energy (ENPH) were used to finance this acquisition, indicating the strength of the solar market. Even after spending that amount, SunPower still had $127 million in unrestricted cash and an additional 2.5 million Enphase shares to use for future acquisitions and purposes.

Investors have benefited greatly from Enphase Energy, with the share price peaking at +2,800% in the 3 years to November 2021.

SunPower’s three-year price return hit a high of 380.96%, outperforming the S&P 500 at 59%. The CEO of SunPower has confirmed that the company has entered into a partnership agreement with Enphase until the first quarter of 2024.

The industry has other avenues for growth, including battery storage. SunPower announced that it has restarted sales of its SunVault storage systems by the third quarter of 2021. The systems will provide distributed storage that could offset distribution upgrades. Upgrades are becoming necessary even among non-solar customers such as electric vehicle owners.

In Q3 2021, the clean energy pipeline saw solar account for the largest share at 54%, onshore wind systems come next at 23%, offshore wind at 13% and battery storage is the last at 9%.

Risk

SunPower’s revenues since it spun off from Maxeon have yet to reach pre-pandemic levels. The company’s net losses in January 2022 increased by 107.87% to $37.4 million from a net profit of $475 million recorded in January 2021.

Legally, SunPower is involved in a securities class action lawsuit. Investors in the company reportedly lost their funds between August 3, 2021 and January 20, 2022, as a result of alleged securities fraud. A negative result, against SPWR, could have a negative impact on the stock price, although we expect this to be a short-term business.

Conclusion

The alluring power of solar technology has boosted the price performance of stocks such as Enphase and SunPower over the past two years. SunPower’s decision to focus on the residential market will help the company scale its digital and financial products toward growing its customer base. The company’s acquisition of Blue Raven is fundamental to establishing a dominant position in other markets as SunPower seeks to increase its long-term revenues. For these reasons, we are offering a buy rating for the stock.