The market is finally seeing the light at the end of the tunnel for SunPower (NASDAQ: SPWR), and for investors, it can't come soon enough. The company has spent the last few years shedding most of its project development business, retooling manufacturing, and investing in an entirely new utility-scale solar panel technology.
What investors have been left with over that time is hundreds of millions in losses and an uncertain place in the solar market. But as 2019 unfolds, it appears that SunPower's strategy is starting to play out like it had hoped. New A-Series solar panels, which are its most efficient yet, are rolling off the production line at costs that management says can compete with commodity products. And the P-Series production investment in the U.S. and China should begin having a significant impact on the company this year.
Image source: SunPower.
Residential solar is where it all starts for SunPower
The residential solar business is really SunPower's bread and butter. The company generates about one-third of its revenue from residential customers and has better margins than commercial or utility-scale markets.
What's new in 2019 is the company's instant design function, which will reduce the design process from about 30 minutes to less than 60 seconds. The software automatically optimizes a home's solar system and gives them options for layouts. This allows for lower costs in the sales process, and will also increase the number of leads the company can serve and engage new customers.
While new design tools are important, what I'm watching for the rest of the year is SunPower's margins, which is where these tools show their value. The A-Series solar panel is supposed to be lower-cost than existing solar panels and management has touted its momentum in residential markets. Any improvements should show up in margins expanding from low double digits the last two quarters to high-teen or low-20s gross margin by the end of the year.
Can a commercial lead become a profit driver?
SunPower has the No. 1 market share in commercial solar in the U.S., but that's done little to drive profitability. The company's average gross margin in the commercial segment over the last four quarters is just 7.3%, which still doesn't include sales or marketing costs.
The inclusion of energy storage in about one-third of commercial solar systems is a positive development lately, but again investors need to see that drive higher margins to know it's adding value.
Lower-cost, more efficient solar panels should help SunPower's commercial solar business, and I'll be watching gross margin for signs of improvement. This will never be a high-gross-margin business given how competitive it is, but if gross margin can reach the high teens, it would be a great segment because there's a lot of scale to be had in commercial solar.
The wild card
SunPower has moved its business away from utility-scale solar projects, where efficiency doesn't have a big advantage. But it still makes a product called P-Series that's slightly more efficient than commodity solar panels and is a form factor that works perfectly with utility-scale projects. The company isn't doing solar farm development for P-Series, but rather selling solar panels and other components to third-party developers.
If P-Series can generate even a high-single-digit gross margin, it could be a win for SunPower because the company already has 2 gigawatts of manufacturing scale built in China. Scale is the only way SunPower will be able to remain competitive and get any contribution from P-Series solar panels, so it's a bet the company had to make. But it may not pay off given competitive dynamics, so this is a wild card that could have a small upside or lead to another manufacturing writedown for SunPower.
Will 2019 see a road to recovery?
There are a lot of bright signs for SunPower and the solar industry more broadly. There's strong demand for solar in the U.S. and around the world, helped by the continuation of low interest rates. SunPower's manufacturing improvements are also key to making the company more competitive with commodity solar panels. Management thinks efficiency from scale and the A-Series solar panel will help drive margins higher in 2019, leading to adjusted EBITDA of $90 million to $110 million in 2019. If it can meet or exceed that mark, it would be a big win for SunPower and show the company is truly on the road to recovery.
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