SunPower's financial woes are tied to inventory and a residential solar slowdown

It's been a rough week for SunPower.

A subsidiary of the rooftop solar company breached a credit agreement, according to a Monday filing, and it warned that “substantial doubt exists about the company’s ability to continue as a going concern.” 

SunPower shares subsequently tumbled by 41% earlier this week. They have since recovered modestly, but remain roughly 20% below where they started the week.

This week’s price drop was the immediate result of a short-term technical issue. In October, SunPower announced it would reissue financial statements for 2022 and the first two quarters of 2023 because of microinverter component inventory valuation issues. Now, after failing to file its third quarter results on time, the company could technically be on the hook for a payment to lenders of $65.3 million. Without a waiver from lenders, SunPower said it may be unable to continue operations.

The company secured a waiver for a larger credit agreement already this month, which led Raymond James analyst Pavel Molchanov to tell Reuters that receiving another one would likely not be a problem. However, an industry note released this week by Roth Capital Partners said the bank’s checks suggest the company’s “cash flow challenges could cascade and result in meaningful cash flow constraints” for its dealers.

But the origins of the SunPower debacle stretch far beyond the technicalities. It has been a rough year for the residential solar market, even as overall solar deployment hit new records. Zoë Gaston, principal analyst of U.S. distributed solar for Wood Mackenzie, said the combination of high interest rates and lower demand is dragging down the market. 

“This is impacting companies in different ways but overall, high interest rates are contributing to a higher cost of capital, cash flow constraints for installers from milestone payment pushed later in the project lifecycle, and a higher cost of customer acquisition,” Gaston said. She added that inflation, customer concerns about the economy, and less urgency to go solar after the extension of the federal investment tax credit have also taken a toll on both installers and financiers. 

Installations in California also dropped 80% after the rollout of new net metering rules, causing turmoil in the country's largest solar market.

SunPower said in its Q3 earnings report that its specific woes are rooted in a longer-than-expected period of low customer sales and installations, as well as higher lease volumes. The latter has resulted in longer waits between sales and installations, which has delayed revenue.

Meanwhile, Gaston cited reports of installer bankruptcies and specifically Sunlight Financial’s recent filing for bankruptcy as evidence of the market’s overall upheaval. And just this week, microinverter maker Enphase announced it would lay off 10% of its employees. Enphase’s stock is down 53% so far this year.   

While 2024 may bring some relief with the prospect of lower interest rates, Wood Mackenzie expects the residential solar market as a whole to contract by 12% next year. 

“This is a tough time for residential solar companies right now,” she added.