Long time Foolish followers know that I have been a believer in SunPower (NASDAQ: SPWR ) since long before the stock became one of the hottest on the market. The company's recent swing into an adjusted profit and guidance of a likely GAAP profit this year have only bolstered that opinion, and the market has responded by sending the stock up fivefold in the past six months.
But for every bull there's a bear, and since we should always value seeing the other side of a stock, I scoured our Foolish ranks to find someone who could make a solid case for being negative on the stock. Today, Matt DiLallo and I will debate the merits of SunPower in hopes of presenting both sides of this solar stock.
Matt DiLallo: The bear case for SunPower
I must be upfront: I've been burned by solar in the past. So far, all three of my attempts to invest in the industry have gone up in smoke. While I see the industry's bright promise, that glowing allure has yet to lead into solid long-term returns for investors.
I see that same allure when considering an investment in SunPower. It stands before the $2.2 trillion electricity market and sees nothing but opportunity, yet that opportunity comes with a cost. The solar industry has developed to the point where it's past the early adopters who have a personal drive to "go green." The vast opportunity that's now before the company, and its industry peers, is the mainstream customer base whose incentive is another kind of green: saving money.
That's a real problem for the company, which has developed a panel that's far superior to a typical commodity solar panel. It's more reliable, it performs better, and it's much more efficient. Truly, this is a premium product -- and with it comes a premium price.
Source: SunPower investor presentation.
The cost differential of a SunPower system against its commodity competitors will remain an obstacle to growth. As more mainstream customers "go green," SunPower must prove that the premium for its product is worth it. If I were to invest in solar, I'd be looking at a low-cost producer, not the seller of a premium product in an increasingly commoditized industry.
Travis Hoium: The bull responds
I'm glad Matt brought up cost as his first salvo, because cost is exactly why I like SunPower so much. The company's selling point is efficiency, and its lead is so large that the cost argument holds very little water when you peel back the nuances of the solar industry.
I've provided a table from an article I wrote in October called "2 Things Every Solar Investor Needs to Know." In the table I compare the cost per kilowatt-hour of a solar installation using "low cost" modules -- which are generally made in China and generally have about 15% efficiency -- with an installation built with "high cost" SunPower modules. The model shows that despite a 33% price premium, SunPower makes for a more cost-effective solar installation when we judge by cost of energy, which is ultimately the correct measure to use.
| System Size | 3 kw | 4 kW |
| Module Cost per Watt | $0.75 | $1.00 |
| Total Module Cost | $2,250 | $4,000 |
| Variable BOS Cost | $3,750 | $5,000 |
| Fixed BOS Cost | $6,000 | $6,000 |
| Total Installation Cost | $12,000 | $15,000 |
| Annual kW-hrs (18% Capacity Factor) | 4,730 | 6,307 |
| Cost per kW-hr (Assuming 8% ROI) | 20.3 cents | 19.0 cents |
What's very interesting is how little module costs matter if SunPower is able to continue to lower costs. In fact, if we assume SunPower can maintain its 5% efficiency lead (something I don't see changing) and it can lower costs to $0.50 per watt, you would have to give away the 15% efficient module to get the same cost per kW-hr. Management expects cost per watt to fall 35% by 2015, so "low cost" producers had better be lowering costs by more than that to keep up.
If "low cost" producers are able to catch up in efficiency, the whole ballgame changes, but there are two reasons they won't. First, Chinese manufacturers such as Suntech Power, Yingli Green Energy, and LDK Solar spend very little on R&D, leaving it up to companies such as GT Advanced Technologies (NASDAQ: GTAT ) to provide equipment that will increase efficiency. Second, Chinese manufacturers are tens of billions of dollars in debt, and they can't afford to invest in the next generation of equipment from GTAT, which promises higher efficiency. That's why GTAT is struggling and Chinese firms, or "low cost" manufacturers, will continue to fall behind.
Matt DiLallo: The bear fights back
One concern I have anytime we're dealing with Chinese low-cost production is the unpredictable government behind them. Just as our government has been burned by subsidizing solar, as Travis has pointed out before, the Chinese government has no problem opening up its wallet to help out the home team. What's to stop it from really making a bet to dominate the solar industry?
That industry dynamic casts a dark cloud in my mind over the potential for future profits that SunPower can generate, but let's forget about that for a moment. Let's just go with the company's own profit assumptions. At its Analyst Day, SunPower projected that this year it might earn up to $0.20 a share on a GAAP basis. At today's stock price, that's just over 100 times earnings. While to some that might sound like a nosebleed valuation, for a company that's just turning profitable, I'll grant you that it's not that scary.
Then, let's just assume that it does hit its ambitious plan to grow GW installed by 50% or from 1.0 GW last year to 1.5 GW by 2015. According to the two analysts that have projected out that far, earnings could come in at about $1.07 per share in 2015. That would mean we are looking at a stock already trading at 20 times 2015 earnings. Again, not outrageous, but a lot has to go right for the company to hit that number.
Now, let's put some doubt into those numbers. We still have a company that's selling a premium product in a commoditized industry that is highly influenced by government intervention. Sure, as Travis has pointed out before, in an ideal world shares could potentially be worth twice what they currently trade. The problem is that this isn't an ideal world, and therefore these unknowns require a deeper discount. As an investor, I find that there isn't enough margin of safety here, which is why I don't see the risk-reward to be very compelling. The stock looks at best fairly valued today.
Travis Hoium: The final word
It's true that China could continue to subsidize its solar industry, and judging by the support Yingli and LDK Solar -- which are both effectively insolvent -- have gotten, that will be the case. But it is my belief that in the long term, the solar industry will be driven by technology, not the commoditization of modules. We've seen a start of that trend over the past year, with SunPower's improving results and flat negative or low-single-digit margins in China.
As far as earnings projections go, all I know is that I'm seeing growth in the solar industry, and I think SunPower can continue to take share and improve margins. Will the company make $1, $2, or $5 per share in 2015? I don't know, and your guess is as good as mine.
The tough part about an investment like SunPower is we're probably years away from a steady state in earnings, so pointing to P/E ratios and other normal valuation metrics are nearly meaningless.
It really comes down to this: If you believe that solar is the future of energy, technology and efficiency will drive the adoption of solar, and return on investment will eventually normalize and reward SunPower for the investment it's making, then it's a great stock to buy. If you don't think solar is the future then avoid SunPower. My chips are, in and I'm betting SunPower's run has just begun.
Join the debate in the comments section below. Matt and I would love to hear what you think of SunPower's stock right now.
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