Sunpower Stock’s Rally Now Makes It Vulnerable

Sunpower stock (NASDAQ: SPWR) is up a surprising 6x since the beginning of this year, and at the current price of around $30 per share, we believe that Sunpower stock has around 20% potential downside.

Why is that? Our belief stems from the fact that Sunpower, a solar module and systems manufacturer, has seen its stock rise nearly 10x from its low in March this year, riding the rally in the S&P and solar stocks. Further, with weak Q3 2020 results and demand struggling to rise to pre-Covid levels, we believe Sunpower stock could head lower. Our dashboard What Factors Drove 830% Change In Sunpower Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Sunpower’s price rise since 2018 came due to an 8% rise in revenue from 2018 to 2019, which despite a 5% rise in the outstanding share count, led to revenue-per-share rising by around 3% from $12.26 to $12.62.

The bulk of Sunpower’s move came due to an 800% rise in the P/S (price-to-sales) ratio, which rose from 0.26x in 2018 to 0.4x in 2019, and has since jumped to 2.4x, riding the rally in solar stocks. Given that solar demand is still not fully back up to pre-Covid levels, we believe there is a possible downside risk for the P/S multiple.

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So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there is much lower demand for Sunpower’s solar module products. Further, residential leasing revenues also dropped in Q3 2020, as installing fresh solar systems for their homes just isn’t a priority for people at the moment. Sunpower’s Q3 2020 results confirmed the hit to its revenue, which dropped to $267 million vs $277 million for the same period last year. EPS came in at $0.26 vs -$0.11 for the same period last year, but this was largely due to a $6 million tax benefit vs a $2 million tax expense in Q3 2019. A closer look reveals that gross margins dropped more than revenue, going from 15.9% in Q3 2019 to 13.5% in Q3 2020.

Going forward, we expect revenues to stay weak in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/S multiple decline from the current level of 2.4x to around 2x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $24, a downside of around 20% from the current price near $30.

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