Image source: Getty Images
SunPower (SPWR) was recently called an “industry pioneer” in the residential solar power space by one Wall Street analyst. That same analyst also just cut their price target for SunPower to $0 on July 19th.
On the same day, the stock dropped 54%. Since then, shares are back up 43%. So, what caused this massive price drop, and how should investors view SunPower going forward?
SunPower halts major operations
On July 18th, SunPower sent an email to its dealers that devastated its stock price. It said it would no longer be selling products under lease or power purchase agreements.
Essentially, the firm will no longer allow customers to buy solar panels under a financing agreement. We don’t know what percentage of SunPower’s sales use these agreements, but it's likely similar to the industry.
The U.S. Department of Energy says 85% of residential solar systems use financing . Thus, SunPower cut its potential revenue by around 85% with this announcement. Reducing revenue to this level essentially ensures the company will never make money.
As solar is a capital-intensive industry, building economies of scale is essential to achieving profitability. Doing this requires increasing, not decreasing, the number of products sold.
Analysts cut price targets
Considering this, it makes sense that the stock lost over half its value the next day. Guggenheim analyst Joseph Osha cut his price target to $0. He believes this “marks the end” of SunPower as a business and that the stock will likely delist.
Osha isn’t the only analyst deeply pessimistic about the firm; Goldman Sachs and Mizuho both dropped their targets to $0.50. Others ended their coverage of the stock completely.
Sunpower's financial results and industry developments
An announcement like this was possible considering SunPower’s recent financial results. Nationwide, solar installations grew by 16% in 2023. In the same year, SunPower saw its revenues decline by 3%, and its gross profit decline by 34%.
An especially poor Q4, in which revenues dropped 28%, capped this off. The firm lost $115 million, its largest quarterly loss since 2018.
Things are unlikely to improve. With such a high percentage of purchases using financing, higher interest rates have punished the industry. Analysts believe installations will fall 20% in 2024 . Growth might resume in the 5% to 10% range in 2025, but SunPower might not make it that long.
California introduced a policy in April 2023 that severely weakens the incentive for residents to install solar panels. When a household’s solar panels produce more electricity than it uses, it can sell that electricity back to the electrical grid.
However, the state reduced the amount homeowners can receive for that electricity by 75%. Data show that this contributed to a decrease in solar installations of 44% from April 2023 to April 2024, versus April 2022 to April 2023.
We don’t know exactly how much of SunPower’s business comes from California, but it is the only state whose sales it explicitly calls out in financial results. The policy is likely to have a large negative impact on the business.
Sunpower's stock rises the next week
The next week was a different story for the share price; it was up 44%. The source of could be to do with its meme-stock association.
The company’s shares rose around 80% over two days in May this year in a short squeeze ignited by meme stock traders. A similar type of action may have occurred this week by speculative investors.
What's next for SunPower?
SunPower's next scheduled earnings release is on August 6, 2024. It is unknown whether this will actually happen. The company’s auditor, Ernst & Young, ended its relationship with the firm in June. The company is now late on filing several regulatory forms, including its Q1 2024 results.
Given the recency of this relationship ending, it's unlikely the firm will be able to find a new auditor and file its statement on time this quarter. Whenever the firm reports results, they are unlikely to be good. Getting out of the stock now is a prudent decision.
