SunPower Earnings: Managing Through A Challenging Industry Environment

We lower our fair value estimate for no-moat SunPower SPWR to $4.50 from $5.50 following third-quarter earnings. The main driver of our reduced valuation is a reduction to our margin forecast as we expect a more competitive environment to pressure long-term margins. We view SunPower shares as fairly valued. We maintain our Very High Uncertainty rating but lower our Capital Allocation rating to Poor from Standard given an increasingly constrained balance sheet.

SunPower’s third-quarter results continued a challenging 2023 for rooftop solar. The company lowered its outlook for customer growth to 75,000 from 80,000 and reduced its adjusted EBITDA outlook to a $30 million loss from $65 million profit. We are not too surprised by the margin pressure SunPower appears to be experiencing as we expect companies along the rooftop solar value chain to be facing a more competitive go forward environment. Sales and installation companies, where SunPower operates, is one of the most competitive areas of the residential solar value chain, in our view. SunPower continues to focus on lowering its costs via wider product selection (diversifying from its historical premium market segment) and addressing its fixed cost base.

SunPower’s balance sheet is increasingly in focus given the deterioration in its financial results. The company ended the quarter with $143 million in net recourse debt after generating $48 million in cash from operations thanks to inventory reductions. SunPower is actively working with its credit facility lenders to evaluate potential waivers as it relates to its credit facility covenants.