Sunpower stock (NASDAQ: SPWR) is up a surprising 6x since the start of this year, and at the current price of around $ 30 per share, we believe Sunpower stock has downside potential of around 20%.
Why is that? Our belief stems from the fact that Sunpower, a maker of solar modules and systems, saw its stock rise nearly 10 times from its low in March this year, riding the rally in S&P and solar stocks. Additionally, with weak Q3 2020 results and demand struggling to reach pre-Covid levels, we believe Sunpower stock may fall. Our dashboard What factors have caused Sunpower’s inventory to change 830% between 2018 and now? provides the key figures for our thinking, and we explain more below.
Sunpower’s price increase since 2018 is due to an 8% increase in revenue from 2018 to 2019, which, despite a 5% increase in the number of shares outstanding, led to an increase in revenue by share of about 3%, from $ 12.26 to $ 12.62.
Most of Sunpower’s decision is due to an 800% increase in the P / S (price / sales) ratio, which rose from 0.26x in 2018 to 0.4x in 2019, and has since climbed to 2, 4x, enjoying the rally. in solar stocks. Given that solar demand has still not fully returned to pre-Covid levels, we believe there is a possible downside risk for the P / S multiple.
So what is the likely trigger and the right time for this downside?
The global spread of the coronavirus has resulted in much lower demand for Sunpower’s solar module products. Additionally, residential rental income also fell in the third quarter of 2020 as installing cool solar systems for their homes is just not a priority for people at the moment. Sunpower’s third quarter 2020 results confirmed the blow to its revenue, which fell to $ 267 million from $ 277 million for the same period last year. EPS stood at $ 0.26 versus – $ 0.11 for the same period last year, but this was largely due to a tax advantage of $ 6 million versus a tax burden of $ 2 million in the third quarter 2019. A closer look reveals that gross margins have declined more than revenues, ranging from 15.9% in Q3 2019 to 13.5% in Q3 2020.
Going forward, we expect earnings to remain low in the short to medium term, and if the company is not able to control spending, we believe the stock will see its P / S multiple drop from the current level of. 2.4x to around 2x, which, combined with reduced revenue and margins, could cause the share price to drop to $ 24, down about 20% from the current price close to $ 30 .
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