Should You Buy the Dip in SunPower? SunPower (SPWR) has been benefiting immensely from the solar power industry's growth, which is being driven in-part by the Biden administrations' push...

Solar solutions provider SunPower Corporation (SPWR) specializes in solar power generation and energy storage, and operates through four segments: residential, light commercial; commercial and industrial solutions; and others. The company's continuing residential business momentum and robust pipeline growth has helped the stock gain 270% over the past year. However, SPWR's stock has declined 27.9% over the past three months and 47.3% over the past four months. Closing yesterday's trading session at $25.90, SPWR's stock is trading 55% below its $57.52 all-time high.

Although the renewable power generation sector has expanded at a fast pace over the past couple of years, the rising price of solar modules could lead to a slowing in uptake of solar power, in both the residential and commercial segments.

SPWR is still struggling to turn its revenues into profit. Furthermore, its increasing losses and net debt could prolong investors' bearish sentiment.

So, here is what we think could influence SPWR's performance in the near term:

Rising Solar Module Prices

Although solar module prices declined 90% over the past decade, they have risen 18% since the start of the year. That's because the cost of Polysilicon—the key raw material used in solar modules—has increased significantly because of supply shortages and robust demand. The supply chain and cost challenges faced by the industry are likely to persist through the end of 2022.

As a result, large-scale global projects could be delayed. This does not bode well for leading solar power provider SPWR. Although the Biden administration's massive green energy push has been a boon for the company, given that the key raw material is experiencing a severe supply squeeze, it could lead to halt in production and potential project delays.

Unimpressive Financial Performance

SPWR's solar power systems, components, and other segment's revenue was $301.24 million, representing a sequential decline of 11% in the first quarter, ended April 4, 2021. Its residential leasing revenue declined 19.2% sequentially to $1.12 million, while its gross profit declined 33.6% to $49.87 million. The company's net loss came in at $49.5 million, compared to a $2.14 million net loss in the first quarter of 2020. Also, its net loss per share came in at $0.28 over this period. Also, SPWR's adjusted EBITDA decreased by 50.5% sequentially to $19.1 million.

SPWR's 16.4% trailing-12-month gross profit margin is 66.2% lower than the 48.6% industry average. Its 0.05% trailing-12-month EBIT margin is 99.3% lower than the 8.1% industry average. Also, SPWR's 0.04% ROTC is 99.2% lower than the 4.4% industry average.

Debt Can Be a Huge Problem

Debt is the main challenge that SPWR faces. Its short-term debt stood at $94.72 million as of April 4, 2021. It has $86.44 million in long-term debt, and total liabilities of $1.23 billion. SPWR's net recourse debt stood at $300 million, while its total recourse debt stood at $514 million. In addition to that, the company's cash and cash equivalents declined 8.6% sequentially to $213 million.

Stretched Valuation

In terms of trailing-12-month EV/EBITDA, SPWR is currently trading at 133.47x, 549.3% higher than the 20.56x industry average. Its forward non-GAAP P/E multiple of 69.62x is 161.4% higher than the 26.62x industry average. In terms of trailing-12-month Price/Book, SPWR's 12.41x is 142.1% higher than the 56.12x industry average.

POWR Ratings Reflect Bleak Prospects

SPWR has an overall F rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. SPWR has an F grade for Stability. This reflects that the stock is more prone to volatility than its peers.

The stock has a C Value grade, which is reflective of its premium valuation. Also, it has a D grade for Growth, in sync with its inadequate financials.

In addition to the grades we've highlighted, one can check out additional SPWR ratings for Sentiment, Quality and Momentum here. SPWR is ranked #14 of 21 stocks in the F-rated Solar industry.

Click here to view the top-rated stocks in the Solar industry.

Bottom Line

Analysts expect SPWR's revenue to decline 7.2% in the current quarter ending June 2021. Furthermore, its EPS is estimated to decline at the rate of 35.4% per annum over the next five years. In addition to weak financials, the soaring cost of the key raw material in solar panels and the resulting delay in solar projects could be a major headwind for the stock. Thus, we think SPWR is a risky bet now.

SPWR shares rose $0.43 (+1.66%) in premarket trading Monday. Year-to-date, SPWR has gained 2.07%, versus a 13.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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