SunPower Earnings: Capitalizing on Robust California Demand in Advance of NEM 3.0 Regulatory Change

We lower our fair value estimate for no-moat SunPower SPWR to $13.50 from $17 following first-quarter earnings. The drivers of our lower valuation are a slight decrease to our gross margin forecast and a higher discount rate to more closely reflect our Very High Uncertainty Rating. We view SunPower shares as fairly valued.

SunPower’s first-quarter results can be summarized by strong customer growth (up 27% year on year) offset by lower near-term margins. Robust customer growth for SunPower is driven by its focus on signing up customers in California in advance of the NEM 3.0 regulatory change in April. The company’s efforts appear to have been successful with its California backlog stretching into the fourth quarter of 2023. In addition, the company noted a strong uptick in customers leasing rooftop solar systems as higher interest rates have had an adverse impact on loan demand.

SunPower’s EBITDA per customer before platform investment was $1,200 in the quarter, well below full-year guidance of $2,450-$2,900. However, the company reiterated guidance given one-time impacts in the quarter (adverse California weather). We agree that first-quarter results were an aberration, but we tweak our medium-term gross margins lower after reassessing our prior assumptions.

While SunPower is expected to grow well above market in 2023 due to signing up California customers in advance of regulatory changes, a key question over the medium term will be how successful the company can be outside of California as the Golden State’s solar installations fall following NEM 3.0 reforms. On this note, SunPower invested in Wolf River Electric in April via its Dealer Accelerator Program. This investment grows SunPower’s business in the upper Midwest states of Minnesota, Wisconsin, and Iowa.