TTE - SunPower: Not Yet Done

2023-11-27 11:23:02 ET

Summary

• SunPower is a Seeking Alpha Quant “strong sell,” with 36.9% of the shares shorted.
• SunPower is majority-owned (50.7%) by TotalEnergies and it has a strong presence in the US domestic solar and energy management scene.
• Notwithstanding reversals over the past 12 months, solar PV has a big future and household solar is just starting in the US.
• The madness regarding SPWR share price (down 83% year on year) may have a lot to do with the extreme shorting of the stock.
• SunPower has a key position in US domestic solar and power management. This is an interesting long-term play that seems dramatically undervalued.

It's truly a surreal time with lots of drama about the looming end of leading companies in new technology spaces. Seeking Alpha’s Quant ratings have “strong sells” for a number of companies and this doesn’t reflect the fundamentals of a number of emerging businesses. In biotech Seres Therapeutics ( MCRB ) looks as if it's about finished when one looks at SA Quant rating (“strong sell”) and a lot of Seeking Alpha articles and commentary. I see little relation to the histrionics about Seres and the actual business. Neither do most of the Wall Street analysts, who mostly have a buy rating. Another area of negative focus by SA Quant is the emerging renewable energy space where “strong sells” are nominated for significant players, including Orsted ( DNNGY ), SolarEdge ( SEDG ), Maxeon ( MAXN ) and SunPower ( SPWR ). Wearing my contrarian hat, here I look at SunPower as a company whose stock price has been smashed, yet I don’t see a basket case. I’m holding despite my SPWR shares being under water. I suggest that for investors looking for substantial relatively near-term gains, SunPower is worth having a look at.

SunPower is more than a solar panel installer

In the early days SunPower was a manufacturer of advanced solar panels, but in 2019 the solar panels business was spun out to form Singapore-based Maxeon Solar Technologies which was listed on the Nasdaq as MAXN. Very recently SunPower and Maxeon have tidied up their relationship, with SunPower to cease its exclusive rights to distribute Maxeon M-Series products in the US in early 2024. This reflects SunPower’s broadening of its solar panel offerings, with for the first time more non-Maxeon panels than Maxeon panels sold in Q3. However the Q3 earnings Q&A also indicated that the Maxeon relationship remains strong and a new agreement that works for both parties seems to be progressing. It's clear that in the panels area quality is going up and the price is coming down, which is good for SunPower and its customers.

As a consequence of the Maxeon spinout, SunPower focused on service, installation and integration of solar PV products with downstream power management, which includes batteries and electric vehicle integration. In early 2022 TotalEnergies ( TTE ) acquired SunPower’s commercial and industrial divisions for $250 million, to enable SunPower to focus more closely on residential solar installations and domestic energy management. Domestic solar PV has barely started in comparison with Europe and Australia. In 2023 30% of Australian households have rooftop solar PV and household generated power is beginning to become a substantial contributor to Australian electricity generation. In September 2023 the average rooftop solar PV installation in Australia was above 9 kW. Approximately 5% of US households have rooftop solar PV. There's a huge opportunity for expansion of the US residential solar PV market, especially as this gets married with domestic power management (including charging electric cars). This is a growth area from a number perspectives. My reference for the potential for rooftop solar PV in the US is an old (2106) report from the NREL. This detailed report suggested that existing rooftops could potentially contribute 39% of US electricity consumption. Note that 2016 is ancient history in terms of power generation from solar panels. Therefore I think the report substantially underestimates the potential contribution of rooftop solar PV to US electricity generation. Skeptics who worry about how much of the US is suitable for solar panels might look into the detail of this report.

SunPower is the leading domestic solar provider and it has high standards for its dealers. The Q3 earnings report made clear that the company has a long-term view and it doesn’t do short-term fixes to make things look better if this gets in the way of long term progress.

The SunPower business has five strategic pillars .

These are :

1. World class customer experience
2. Best, most affordable products
3. Growth
4. Digital innovation
5. World class financial solutions

The Q3 2023 earnings call transcript and Q&A provides a useful perspective on how SunPower is addressing the above five pillars, with “Growth” perhaps the most challenged area. However SunPower sees that increasing utility rates and lower equipment pricing will be tailwinds for the industry.

Key highlights from the SunPower Q3 earnings transcript

Quarterly reporting is important in my decision-making about investment because you get a sense as to how the company is going and also you get a sense of highlights. I give three examples of new things I took away from Q3 reporting. I encourage investors trying to get a perspective to read carefully the entire Q3 report along with the Q&A.

Home installations : The overall environment is unrelenting but there were some green shoots in Q3, with 26% growth in new home installations compared with Q2 and a 38,000 new home backlog (15%-20% of total customers in 2023); there also was an 18,000 customer retrofit backlog. Conventional electric utility rates are rising (due to for example rising natural gas prices) and this provides opportunity. SunPower has identified 40 million potential customers in states where electric rates are rising faster than inflation.

SunPower approach to energy storage : There's a big focus on integration of panels, storage and EV chargers, plus resilience on grid outages, especially in California. Customers want to be able to manage seamlessly the above areas in a single app, which in the past have been individual issues to be addressed. California is a standout for batteries with more than 60% attach rate. It was noted that, along with decreasing solar panel prices, battery storage costs are declining rapidly.

Batteries : In the Q3 Q&A it was acknowledged that a lot is happening in the battery space and this means there are a number of quality manufacturers emerging. This means that SunPower has decided to stop its own SunVault battery product. While there are no announcements yet, the Q3 earnings call Q&A made clear that SunPower is talking with more than one battery supplier as it stops its development of its own SunVault 2.0. This seems a sensible approach and it allows SunPower to focus on what it does best, managing integration of various aspects of the renewable energy story.

SunPower’s major investor and massive short

SunPower’s major shareholder is TotalEnergies, which acquired a controlling interest in 2011 for $1.37 billion. It's in for the long haul and one of the fossil fuel companies that's clear about the exit from fossil fuels, although the reality is that TotalEnergies has retained a major long term stake in the future of LNG . With a 50.7% stake in SPWR, TotalEnergies has a big and stable influence.

As of Oct 31 2023, 36.93% (31,870,000) shares of the public float (88,880,000) of SunPower have been sold short. SunPower therefore has a huge short interest, with more than 30% of tradeable stock controlled by investors seeking to have the share price of SPWR fall. This is a big deal and I argue a substantial reason for the current parlous share price of SPWR.

Climate stuff is biting

For more than 50 years climate scientists have been warning that we humans have the capacity to change the planet we live on, and we have been doing this since coal, oil and gas began to get exploited on a massive scale. This has led to increasing greenhouse gas emissions and this year will be the hottest since modern records have been recorded. The rise in CO2 and methane has been attributed to burning fossil fuels and the scale of warming accurately related to fossil fuel exploitation. Our current trajectory is for 3C temperature rise when the science says that 1.5C rise is as much as humankind can manage without major problems. An update on the climate from the important science journal Nature gives some perspective, and a recent interview provides the views of prominent Australian climate scientist Leslie Hughes.

My bottom line has been for some time that the fossil fuel industry has been successful in convincing governments that fossil fuels are essential and that a decarbonized world that ceases to exploit fossil fuels isn’t going to happen. This remains the position of major oil and gas companies, especially Exxon Mobil ( XOM ). The technology is available but the will to change hasn’t been there when things like the end of coral reefs and species extinction are the consequence. Food and shelter are different because Governments don’t survive when these core needs are endangered. I argue that in the past two years food security and housing are now under significant threat by climate change. This is a significant reason why I sense that rapid change is coming and SunPower is well positioned to benefit.

Seeking Alpha’s Quant ratings

Seeking Alpha’s Quant ratings are an interesting feature and the results are in. Quant “Strong Buys” dramatically outperform the S&P 500. However, investing is complex and one size doesn’t fit all. My investment interest is in emerging stuff, where the risks are high but the returns outstanding. I’ve found that Quant has a perverse indication in the kind of stocks I follow. Many of the stocks that have best returns for me are in the “Strong Sell” Quant rating. Clearly the Quant platform performs brilliantly for established, profitable companies.

Being a contrarian, perhaps it's to be expected that I might find perversity in the emerging company space. Of course pay attention to Quant, but you will quickly see that Quant is not always the best predictor. I wonder if Seeking Alpha has thought about analyzing companies that perform poorly with different metrics? For me a very negative Quant is grounds for caution, but not necessarily grounds to avoid the companies, as I suggest here for SunPower. On the contrary for some companies I think a strongly negative quant and a big number for shorts indicates to me possible opportunity to buy at a discount to real value.

Shorting changes the investment scene

I’m beginning to realize that when a very large percentage of a stock is shorted, the game changes. Having 37% of the stock held short, as is the case for SPWR, this means a huge pressure on the stock to perform badly because the shorts have a lot to lose if it doesn’t. And shorting losses don’t have a cap. I argue that this changes the investment metrics because a (the?) major influence on stock price now focuses on destroying the company. I suspect that this may be the position that SunPower finds itself in. Under some circumstances, it becomes self-fulfilling and the company goes bust. I’m interested in the cases where the company has a legitimate problem which is not fatal. With SunPower there has been a pause in investment in solar PV, but I argue that this is not a long-term trend and indeed we're close to seeing change in sentiment toward solar stocks. SunPower has the additional negative (which is becoming a positive) that it's an integrator and solution provider rather than a manufacturer.

Conclusion

Having looked at recent Seeking Alpha articles concerning SunPower and Seeking Alpha’s “strong sell” Quant rating, I expected to see a basket case, but a deeper look at SunPower leaves me with the view I had when I invested in SunPower some years ago. This is a company in the domestic solar PV/energy management space that's well positioned to be a major player in a field that has a big future. Of course there's risk and the times are mad, but surely this should be on the radar of investors looking for substantial gains in emerging areas where a lot of technical risk is gone, but timing remains the enemy. Enphase has had a horror year, down 68.6% year on year and it has just moved from “strong sell” to “sell” by Seeking Alpha Quant, yet it's up from $75 at the start of November to $100 today. SunPower is down 82% year on year, with bottom around $4 in late October and today trading at $4.18. Perhaps it might turn around sometime soon, when the massive short attack gets resolved and SunPower gets valued on fundamentals rather than the power wielded by company killers?

I'm not a financial advisor but I follow closely technology areas where dramatic change is happening, and I seek to understand the why and how. I hope that my commentary about SunPower is of some use to you and your financial advisor as you consider possible investment in the solar industry at a time when power and transport are rapidly becoming electrified and there is a big focus on managing energy efficiency. As regards Seeking Alpha seeking a black and white “buy,” “hold,” “sell” designation, my take is definitely not “sell,” but instead for people like me who have SPWR shares I’m a "hold." I think it gets interesting for new investors who have the opportunity to acquire the shares at a massive discount compared with this time last year, but of course you need to do the work to decide where you think the company stands.

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