Maxeon Solar Technologies Preliminary Earnings: Don’t Buy This Dip (NASDAQ:MAXN)

Investment Thesis

Maxeon Solar Technologies (NASDAQ:MAXN) delivers preliminary results that imply that its revenue growth rates are slowing down at a rapid clip.

Not only are its revenues expected to shrink by 37% y/y, but more crucially, its net debt position has significantly increased. What’s more, the business’ underlying cash burn is rapidly increasing.

I believe investors would do well to avoid buying this dip.

Maxeon Solar Technologies Near-Term Prospects

Maxeon Solar Technologies operates in the solar energy industry. They focus on two main areas: utility-scale solar projects and distributed generation (”DG”), which includes residential and commercial solar installations. In utility-scale projects, they manufacture solar cells and panels for large-scale solar farms, primarily in the United States. They’re also working on building a new manufacturing facility in New Mexico to increase their production capacity.

For DG, they sell solar panels directly to installers, who then put them on rooftops of homes and businesses. They’re also introducing a new and more efficient solar panel technology called Maxeon 7.

In the near term, Maxeon faces challenges across its distributed generation business. While the utility-scale sector in the United States is showing stability of growth, Maxeon encounters hurdles in its DG business.

Indeed, as Maxeon’s CEO Bill Mulligan noted in their press release, Maxeon continues to see a slowdown in DG demand. These factors contribute to a decline in DG demand and present obstacles to Maxeon’s revenue streams and profitability.

On top of that, Maxeon has to continue defending its intellectual property through patent infringement actions, which adds complexity to Maxeon’s operations.

Given this context, let’s now delve into its financials.

Revenue Growth Rates Fizzle Out

The graphic above shows a business that was previously delivering solid revenue growth rates. However, its latest guidance points to a business that has hit a stumbling block, with Q1 2024 guiding for its revenue to decrease by approximately 37% y/y.

As a reference point, analysts following Maxeon were previously expecting its Q1 2024 revenues to compress by approximately 24% y/y. But not as much as a 37% y/y decrease in revenues.

But I believe that’s not even the whole story. The bear case is more fully developed in the next section of this analysis.

MAXN Stock Valuation – Too Difficult to Value

Here’s the problem. Together with its preliminary earnings, we are not given Maxeon’s latest balance sheet update. But we do know that Maxeon had approximately $432 million of debt as of 1 October 2023 (page 14), back in Q3 2023.

Meanwhile, we know that Maxeon’s cash position has decreased by approximately $70 million during Q4 2023 from approximately $270 million in Q3 2023 to just under $200 million in Q4 2023, but we do not know how much of this decrease in cash was used to pay back debt versus cash burn through operations.

However, we do know that approximately $25 million of its debt was carried as a current liability; therefore I believe that possibly $25 million out of the $70 million of cash used in the quarter may have been used to pay down its current debt obligation.

In sum, I estimate that Maxeon’s net debt position probably stands very approximately at $200 million of net debt.

This means that more than 100% of its market cap is made up of net debt. Moving on, let’s discuss its underlying profitability.

Back in Q3 2023, Maxeon’s adjusted EBITDA margins were negative 9%. And its preliminary results imply that its EBITDA margins will come in at around negative 15% in Q4 2023.

Given that its guidance for Q1 2024 implies its revenues will be down approximately 37% y/y, I believe this would see its underlying EBITDA margins compressing to around negative 18%.

This means that this business is not only shrinking, but its losses are increasing, while its equity is becoming a smaller part of its total enterprise value.

The Bottom Line

In light of Maxeon Solar Technologies’ poor guidance, I am compelled to advise investors against buying this dip.

With a significant decline in revenue growth rates, an anticipated decrease in revenues by approximately 37% y/y, and a substantial increase in net debt position, the company’s near-term prospects appear precarious.

The ongoing slowdown in distributed generation demand further exacerbates the company’s situation.

Moreover, with negative adjusted EBITDA margins projected to worsen alongside shrinking revenues, it becomes evident that the business is not only contracting but also facing escalating cash losses. Avoid this stock for now.