Travis Hoium: The bull responds
I’m glad Matt brought up cost as his first salvo, because cost is exactly why I like SunPower Corporation (NASDAQ:SPWR) 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 Corporation (NASDAQ:SPWR) makes for a more cost-effective solar installation when we judge by cost of energy, which is ultimately the correct measure to use.
| Metric | 15% Efficient Module | 20% Efficient Module |
|---|---|---|
| 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 Corporation (NASDAQ:SPWR) 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 Holdings Co., Ltd. (NYSE:STP), Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE), and LDK Solar Co., Ltd (NYSE:LDK) spend very little on R&D, leaving it up to companies such as GT Advanced Technologies Inc (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 Corporation (NASDAQ:SPWR) 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.
