MAXN - Maxeon Solar: Upbeat Performance As The Business Continues To Upscale

2023-03-08 14:20:59 ET

Summary

• Maxeon Solar beat revenue expectations in its Q4 financial report and forecasts a strong Q1 2023 expecting positive adjusted EBITDA for the first time since its spinoff.
• Maxeon is increasing its manufacturing capabilities, strengthening sales channels through new partners, improving gross profit margins and diversifying revenue streams.
• Margin pressures are easing, and MAXN has a multi-year contracted backlog guaranteed.
• I'm cautious on whether the business will remain profitable, the competitive nature of the industry and geopolitical factors that could impact future growth.

Maxeon Solar Technologies, Ltd. (MAXN), a small-cap renewable energy stock with an $844.06 million market cap, has soared by 34.77% since the latest release of its Q4 2022 financial report and the optimistic forecast going into FY2023. Over the last year, investors have been rewarded with 130.99% returns.

We are seeing MAXN enter a new growth phase in the business by expanding its manufacturing capabilities, strengthening sales channels, diversifying revenue beyond panel solutions and improving its gross profit margins. Management has forecasted a positive outlook for FY2023. I believe there is a lot more upside potential if we look at the growing multi-year backlog, MAXN's new US sales channel (which will see it take orders for its own branded panels for the first time), the untapped opportunistic market space left after LGs solar industry exit in 2022 and a new CEO with experience in upscaling manufacturing operations onboarded in January 2023. Therefore I remain bullish on this stock.

Maxeon is upscaling the business

My previous articles give an overview of MAXN and its developments since spinning off from SunPower ( SPWR ) in 2020. We are seeing the company which produces solutions for residential rooftops ((DG)) and the utility-scale power plant market enter a new growth chapter, moving into a bigger and more international playing field with the ability to sell its own branded solar panels in its US channels. Since January 2023, the company has onboarded a new CEO, Bill Mulligan , with experience in the industry and proven capabilities in scaling up manufacturing operations. Below are some of the highlights in MAXN's targeted markets.

MAXN has a few fundamental tailwinds. Mid-last year LG exited the solar industry leaving behind market gain potential in the more profitable premium segment for those peers remaining. Secondly, MAXN has its Maxeon Installer Channel through Greentech Renewables alongside the existing SPWR dealer network. The market is forecasted to surpass 6 Gigawatts in the US residential market in 2023.

The company aims to continue investing in its beyond-the-panel solutions and push its DG channels internationally and within the US. Furthermore, the management continues its plan to set up a US 3-GW cell and module manufacturing facility in the USA, which is currently in the final stage of the LPO process. In the future, this should lead to significant benefits from the Inflation Reduction Act -related incentives.

MAXN financials and stock valuation

MAXN surpassed performance expectations in its most recent Q4 2022 fiscal results, driven by increasing shipments, strong DG demand, solid ASPs, a drop in crucial material costs and operational efficiencies. Revenue for Q4 2022 was $324 million, up from $222 million in the prior year's Q4. We saw positive gross profit for the first time at $21 million and a record-high gross profit margin of 6.4%. Drivers behind the improved margins were a drop in freight prices and increased manufacturing performances in Mexico and Malaysia. Adjusted EBITDA in Q4 surpassed the negative $17 million guidance, reporting only a negative $4 million. Net losses increased to $76 million from $45 million in Q3 2022.

Below we can see the improvement in gross margin and the company's forecast for a more significant margin in Q1 2023.

If we break this down into revenue by end market, we can see that its DG market is the most significant growth driver, although both markets have continued to grow YoY from Q4 2021.

If we break down revenue by geography, we can see that all geographies saw year-on-year growth, excluding APAC and that the US and Canada region has become its most prominent driver of revenue growth over the last year.

Looking at MAXN's balance sheet, we can see that the company had $344 million in total cash closing Q4. Capital expenditure was lower than usual at $7 million for the quarter.

Suppose we compare MAXN to two of its larger peers in the industry, ranked by Forbes as the best solar companies of December 2022, ADT Solar by ADT Inc. ( ADT ) and previous parent company SPWR. Although MAXN has yet to reach profitability, it ranks better across Seeking Alpha's Quant grading system on valuation, momentum and EPS revisions. Furthermore, MAXN has a price-to-sales ratio of 0.80, indicating investors are investing less than one dollar for every dollar earned by the company in sales, whereas its competitors have ratios above one.

Risks

Although there is much to get excited about due to MAXN's performance compared to its previously planned outcomes, we must be aware that MAXN remains an unprofitable business, which has taken on much debt to grow and invest in the technological advancements within its operations and solutions. Furthermore, the solar industry remains very volatile and competitive. The market is highly influenced by geopolitical factors, such as trading rules and regulations, that can affect performance and potential growth. Large companies like LG have left the industry entirely, while competitive acquisitions have taken over other peers. There is a risk in betting on companies not producing positive earnings.

Final thoughts

MAXN can finally build on its existing foothold in the US with its branded solar solutions through a new sales partner and is furthering its intention to build a manufacturing facility within the USA. This is a huge step toward an upward performance for the company's long-term top and bottom lines. MAXN is well positioned to deliver positive adjusted EBITDA for the first time since its spinoff from SPWR in the upcoming Q1 2023 due to increased demand, lower material costs, decreased freight expenses and substantial operational efficiencies. We are seeing development on the manufacturing and sales front for the business, with exciting ventures ahead for the new financial year. Therefore I remain bullish on this stock.

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