Since SunPower Corporation (NASDAQ:SPWR) started its incredible run in late 2012, I’ve gotten a couple of questions over and over again. First, people want to know if it’s too late to get in on SunPower. To that I say, very firmly — I don’t think so. I have no idea what the market will do tomorrow or next week. I have no idea when a project sale will be announced or when a short squeeze will shoot the stock higher.
Which brings me to the second and probably more important question, which is: How high can SunPower go?
Since I’m a SunPower investor, I’ve wondered this myself. I think it can go higher, much higher, but let’s put some numbers behind that thesis.
One of the challenges in comparing SunPower with other high-tech manufacturers is that the company is in a far more transitional part of an industry cycle than mature manufacturers are. The company isn’t yet profitable, although it’s trending that way, and the industry has yet to reach a steady state where we can expect a certain amount of revenue growth or market share. But let’s look three to five years into the future and see if we can use multiples to put a valuation on SunPower.
Let’s look at three companies that develop, manufacture, and sell products to consumers that take a lot of technology but often have very simple uses. I think, long-term, this is where the solar industry will end up.
| Company | Price/Sales | Price/Book | Profit Margin | Forward P/E |
|---|---|---|---|---|
| 3M | 2.4 | 3.9 | 14.9% | 13.8 |
| Procter & Gamble | 2.5 | 3.2 | 15.5% | 17.5 |
| Cisco | 2.4 | 2.0 | 19.7% | 10.0 |
| Estimated Range | 2.2-2.8 | 2.0-4.0 | 14%-20% | 10.0-18.0 |
Source: Yahoo! Finance.
Now let’s put those multiples to work. I’ve multiplied these numbers by the corresponding value for SunPower and given a stock price to go along with it. Note that I used non-GAAP revenue because it smooths out lumps generated by the systems business. The last row uses existing revenue, puts a comparable profit margin on it, and then multiplies by a comparable forward P/E ratio.
| Metric | Value | Market Cap | Stock Price |
|---|---|---|---|
| Price/Sales | 2.2-2.8 | $5.8 billion-$7.3 billion | $48.41-$61.62 |
| Price/Book | 2.0-4.0 | $2.0 billion-$4.0 billion | $16.67-$33.35 |
| Profit Margin + Forward P/E | 1.4 to 3.6 times revenue | 3.7 billion-$9.4 billion | $30.81-$79.22 |
Even on the low end of this analysis, the stock is very undervalued. We’re making a lot of assumptions to get here, like similar profitability to manufacturing giants, but I don’t think they’re a stretch at all. This is a high-tech industry that will eventually generate high profitability for those who gain a large amount of market share.
Interestingly, First Solar, Inc. (NASDAQ:FSLR) has a lot of upside based on these numbers as well. With the same revenue multiple, the stock would be worth between $75 and $95. That’s more than double what the stock trades for now.
This gives us one way to judge SunPower’s eventual value. Given a steady state of earnings, I don’t think $50 per share is out of the question. But there are other factors to consider.
What about growth?
The solar industry is huge, and it’s growing rapidly around the world. But one of the big challenges is the number of manufacturers vying for sales. Most industry experts expect a massive shakeout that will leave a handful of manufacturers controlling the market. Just think how high SunPower can go if it is one of those companies. For this, we need to make some wild assumptions — but we can try.
