MAXN - Maxeon Solar: Battling Headwinds While Powering Toward Growth

2023-08-15 23:35:09 ET

Summary

• Maxeon Solar Technologies experienced a drop in stock price and increased short interest after missing revenue expectations and lowering its FY 2023 forecast.
• The company has made significant moves for long-term growth, including expanding sales opportunities in the US market and confirming a new factory in the USA.
• Despite short-term challenges, MAXN has improved its financial performance and aims to capitalize on its position in the utility-scale and DG markets for long-term growth.

One year ago, I wrote my first article on Maxeon Solar Technologies Ltd. ( MAXN ); the stock had gained momentum until its most recent Q2 2023 earnings report. The company reported negative earnings, it missed revenue expectations and lowered its FY 2023 forecast. The reaction to the news has been very adverse, with the stock price dropping dramatically and short interest at 17.06%. Over the last year, the stock price lost 28.49% in value.

While we should be cautious of the European residential market challenges, the ongoing dispute with SunPower , and the market slowdown impacting its performance for FY 2023. Over the last year, Maxeon has improved its top and bottom-line performance. Furthermore, significant moves put it in a position for long-term growth. Firstly its sales opportunities have grown within the US market, where it can now sell its own-branded offerings. Secondly, the company is progressing on its factory in the USA , which will be able to produce up to 3 GW/year of solar cells and panels per year. This will double the current production levels, and it is said to go live by 2025. While there are short-term headwinds, the company has progressed in the last year to boost its long-term growth potential. Therefore I maintain a bullish stance.

Updated growth catalysts and challenges

When we look at Maxeon Solar, we need to consider that it is a solar player in many geographic locations and generates revenue through two targeted markets: Distributed Generation ((DG)), which is focused on the residential market, and Utility-scale, which are large-scale projects. Below is an update on these two targeted markets.

Two significant updates regarding Maxeon are the launch of its US sales channel and the announced selection of Albuquerque, New Mexico, as its US manufacturing site. This facility is expected to significantly increase manufacturing capacity and contribute to reshoring the solar supply chain to the United States. The utility-scale business accounted for over 1.4 GW of annualised volume in Q2, with 90% in the US. The Mexican facility achieved total capacity, and Maxeon's focus is now on US expansion.

The DG market experienced rapid changes in demand due to policy disruptions and interest rate impacts. Despite challenges, Maxeon maintained strong average selling prices, achieved gross profit, and adjusted EBITDA above the guidance midpoint. Maxeon's strength lies in its diverse solutions sold through unique channels, which help it maintain growth despite market challenges.

Q2 2023 Earnings updates and an upset market

Maxeon initially generated excitement in Q1 2023 with positive EPS results; however, this enthusiasm waned in Q2 2023 as EPS turned negative and revenue fell short of analyst predictions. Despite the revenue miss, the company achieved 9% sequential and 46% year-on-year revenue growth. This expansion was primarily attributed to the company's concentrated efforts within the U.S. utility-scale market.

In Q2, Maxeon experienced an increase in total shipments, with 807 MW, which represents a 4% sequential growth and a 55% year-on-year increase. The company's revenues reached $348 million, and the adjusted EBITDA was $30 million. However, for Q3 2023, Maxeon anticipates a decline in shipments, projecting 700-740 MW due to softness in residential demand. Despite this, the company still expects revenues between $280 million and $320 million, with gross profit in the low double digits. Additionally, Maxeon now projects fiscal 2023 revenue to be between $1.25 billion and $1.35 billion, compared to its prior outlook of $1.4 billion to $1.6 billion.

It's worth noting that Maxeon's cash burn remains an area of concern, as levered free cash flow was negative at $76.5 million in this quarter. However, this is to be expected as the company is currently in a growth phase, which requires significant investments. Fortunately, the company has a total cash of $435.46 million, and its current ratio of 1.77 and quick ratio of 1.01 indicate that it is liquid enough to cover its short-term liabilities. Overall, Maxeon is making strides in the solar industry and is taking necessary steps to ensure its long-term success.

Valuation

Maxeon's short interest remains high at 17.06%, which indicates negative sentiment. However, it has reduced since my most recent article ; at the time, short interest stood at 21.94%. Various analysts have also cut the price target, which is at an average of $32.88 , which still allows for a lot of upside potential at its current trading price. We can see an impressive top-line growth YoY of 40.14%, although the upcoming quarters are expected to soften due to decreased DG demand. The company has yet to produce positive annual earnings, but it has an attractive EV-to-sales ratio of 0.64, which could indicate that it is currently undervalued.

Risks

Investing in solar energy stocks poses risks due to their volatility, influenced by geopolitics and legislative initiatives. Maxeon's outlook is uncertain due to its contractual dispute regarding non-compliance with the contract with former parent company SunPower and a slowdown in the residential solar panel market. Regulatory changes may further impact demand for solar solutions. Furthermore, a lot of the potential growth will be determined by the yet-to-be-built manufacturing facility; risks and uncertainties are still involved, such as the type of loan the company will receive to make such a significant investment.

Final thoughts

Maxeon posted disappointing financial results in its Q2 2023 Earnings and has lowered the FY2023 forecast. We have seen the stock price drop drastically, and we should be cautious of the company's ongoing contract dispute, the slowing down of the solar residential market, especially in Europe, and the growing cash burn. However, over the last year, the company has improved its top-line results, is closing in on its manufacturing facility in the US and has increased its sales opportunity within the US. Therefore, I maintain a positive stance on the company.

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