SunPower Business Model: Is it Tiffany, Apple, or IBM?

It seems that the most important meetings at SunPower all take place in the Tiffany & Co. conference room. In fact, all the other conference rooms are named after significant SunPower installations—Nellis (14.2 MW), Bavaria One (10 MW), Moscone (675 kW), and Olivenza (18 MW).

Perhaps the high-quality, luxury jeweler, Tiffany & Co., provides an apt metaphor for the SunPower brand positioning and business model. SunPower produces a high quality product that appeals to a very sophisticated customer. Travis Bradford with the Prometheus Institute states, “SunPower makes a damn fine product, but the sales process requires a bit of nuance to get the full value from customers.”

Julie Blunden, Executive Vice President for Public Policy and Corporate Communications, seemed pleased with the comparison of her company to one of the world’s most recognized global brands, yet added “we have to make a product that is within people’s grasp. Perhaps a better comparison is the old, reliable IBM.” So SunPower wants to be high quality, but not an elite, once-in-a lifetime purchase.

Perhaps SunPower is a mix of IBM and Apple—a company that is known for innovation and quality as well as premium prices. It is common to hear the following about SunPower: “Great Product, High Price.” And like Apple purchasers, many customers are willing to pay the higher prices. Currently SunPower is #1 in U.S. market share for both residential and utility scale installations and has the greatest number of installations as part of the California Solar Initiative.

Need to Reduce Costs

To increase and hold its customer base, SunPower is working aggressively to reduce manufacturing and installation costs through:

• Creation of Oasis Power Plant system. The “power plant in a box” allows rapid, efficient installation at rates of faster than 1 MW per day. According to the August 10, 2010 investor call, Oasis reduces balance of system cost by 25 percent.

• Construction of Fab3 manufacturing facility. Fab3 is expected to triple panel output and allow SunPower to meet customer demand. SunPower is currently sold out of panels and has strict product allocations among 1,000 worldwide dealers and its utility business.

• Vertical integration. SunPower is a fully integrated company with manufacturing, residential, large-scale commercial, and utility business units. Vertical integration raises SunPower’s absolute gross profit. The “May 11, 2010 Earnings Call Transcript” reported absolute gross profit can exceed $1.70 per watt for deployment of a fully integrated system in Italy. That would translate into $600 million gross profits by the end of 2011 for its 360 MW Italian pipeline.

Cost of Panel Does Not Equal Cost of System

SunPower also wants people to know that the cost of a panel does not equal the cost of a system. With 50 percent more efficiency and quicker installation times, the customer will benefit from shorter payback periods and greater returns on the investment such as higher internal rates of return (IRR) and higher net present values (NPVs).

But, where high efficiency really pays off is in places of limited or expensive square footage. This is why SunPower won a bid for 200 of the 250 MW of Southern California Edison’s distributed generation rooftop program. Gil Alexander, spokesperson for Southern California Edison, said, “when leasing roof space, one of the business interests is to get the biggest bang for the buck. In the end, SunPower’s high efficiency panels and rapid installation penciled out as the best product for our needs.”

Future Plummet or Profits?

With all these advantage, why is the SunPower stock in the basement?

To start with, 2009 was a tough year for SunPower. On top of the economic crisis that prevented SunPower from hitting its 2009 targets, SunPower had to restate its 2008 earnings. Investors are also cautious about the large bet SunPower is placing on the 100 MW European pipeline primarily coming from its purchase of SunRay. According to Julie Blunden, the stock price is also suffering from “a large amount of unrealized revenue for 2010.”

So it would seem to be a good time to buy SunPower stock if you believe:

• Fab3 begins producing panels by the end of 2010 as expected.

• SunPower can get costs down as predicted.

• SunPower will permit, finance, construct, and realize revenue for all 360 MW of its projected utility pipeline in Italy.

• The Italian Parliament will pass the pending bill that holds the feed in tariffs at a price that is attractive and in line with SunPower’s economic forecasts. Bloomberg cited that “the [June 2010] decision leaves the rates Italian utilities pay for solar power among the most attractive in Europe and may trigger a rush by developers to build solar plants in Italy.” With the 2010 SunRay acquisition, SunPower is poised to be first in line for these profits.

Built to Last?

The challenge with solar is that it currently has the glitz of a dot.com era iPod but requires the longevity of a 30-year home mortgage. Putting a solar system on a roof or in the desert is a 30-year commitment. You want to make sure that the parts last, the system has long-term warranties, and the company will be around to honor those warranties. SunPower is a company that is planning for a long future. If they can get their costs down, SunPower is a company that will be here to provide high quality solar services for a long, long time.