SunPower is a Semiconductor Company, and deserves to be valued like one.

SunPower is on a roll. Revenues for Q2-2008 were $383 Million - up 120% yoy. Guidance for 2009 was excellent, I think that SPWR's management is excellent, and their products are the best in the industry. Until someone comes up with a cheap multi-junction solar cell, SPWR will be the top dog for cell efficiency - a measure of how much of the sun's energy can be converted to electricity. SPWR depends on polysilicon to make their solar cells - in other words, their technology is mainstream - the only differentiator are the dyes used in processing - while that is interesting for a guy who designed chips for a decade and was issued four patents, that is a discussion for another day.

Let me get to the point. SunPower is a semiconductor company. They use semiconductor technology, processing to manufacture their solar cells, and ultimately will be valued like semiconductor companies are. So, let us analyze SPWR like a semiconductor company. As a semiconductor company, they are very richly valued at 5 to 6x sales. Do their gross margins justify such a rich valuation ? Absolutely NOT. Let's look at some numbers. SPWR's gross margins are about 20%. INTC, BRCM and TXN are at around 54% gross margins - but BRCM is fabless. Note that traditional semiconductor companies are not affected by government subsidies, and coal, nat gas and oil prices to the extent that SPWR is but these are not a big deal for a cutting-edge semiconductor company with a defensible technology that is either patent protected or hard to duplicate.

But that is not the case with SPWR. The technology to produce poly based solar cells is [in my eyes] primitive. So primitive that there are one hundred and seventy chinese companies coming online in the next year and a half. SPWR charges a premium for their solar cells that are a few percent more efficient than the ones made by SunTech or Yingli Green [STP, YGE].... and the kicker - that brought SPWR down from the triple digits - Spain cannot afford their huge solar subsidies for much longer [which have been the driving force behind the adoption of PV in Europe].

In short,
1. SPWR is a semiconductor company that has fabs [not fabless].
2. Has lousy gross margins for a semiconductor company.
3. Are subject to more vagaries of the market than traditional semiconductor companies like....
a. Subsidies in Spain, Germany and the USA
b. Oil prices [and nat gas and coal]
4. Is not made using very sophisticated technology that prevents the competition from getting into the business.
5. A gazillion chinese companies will make this a commodity business in under two years.

The bottom-line: SPWR deserves to be valued like a semiconductor company with gross margins of 20%, and not much of a technological edge over its peers. That would put the stock at below $40/share. Of course more subsidies and triple digit oil will put a temporary floor on this stock's price, but it will not last for long - as I expect polysilicon prices to be much lower in the next eighteen months - which will encourage more competition at the bottom end of the PV market.

Bapcha