KIEV, UKRAINE – 2018/12/07: In this photo illustration, the SunPower Solar energy company logo seen … [+]
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Despite ~20% decline in SunPower’s (NASDAQ: SPWR) stock since the beginning of this year, at the current price of $6 per share, we believe SunPower has a significant downside.
Why is that? Even though SunPower’s stock is down 26% since the end of 2017, this move has entirely been driven by a contraction in the P/S multiple, with revenue per share down only 2% over this period. We believe that given the current crisis, revenue per share could decline 40% in 2020, and the P/S multiple could see a further 40% contraction.
Our dashboard How Low Can SunPower Stock Go provides the key numbers behind our thinking for the drop, and we explain more below.
The point is, SunPower’s P/S multiple has been a significant contributor to this stock’s fall over the last 2 years, but the P/S multiple is still higher than the 0.3x at the end of 2016.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant that installing new solar modules and power systems is just not a priority right now, for both people and companies. This will likely have a significant impact on SPWR, due to an overall decline in demand for solar power systems. This could see revenue take a major hit, dropping to levels of just over $1 billion. We believe SunPower’s Q1 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q2 as-well-as full-year 2020 guidance.
Specifically, we believe the full-year revenue expectations formed by the market at the time of May’s Q1 results may be closer to $1.1 billion – about 35% lower than its 2018 revenue of $1.7 billion, and a further 42% lower than the 2019 revenue of $1.9 billion.
There will likely be a knee-jerk reaction from investors, and SunPower’s P/S multiple may shrink by about 40% from the current 0.5x to around 0.3x last seen in 2016.
This would mean a double whammy of 40% lower revenue per share and 40% lower P/S multiple, translating into SunPower’s price drop of ~60%, to about $2 or lower.
Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.