It's been a rough few years for solar stocks, despite the fact that adoption of solar energy is booming around the world. This year alone, 100 GW of solar are expected to be installed, enough to power 16.4 million U.S. homes, and the industry is just starting to grow in markets like the Middle East, Africa, and India. 

The industry's growth hasn't led to profits for solar investors over the last few years, but that may start to change in 2017. Companies like First Solar (FSLR -1.06%) and SunPower (SPWR -0.80%) are improving their solar panel efficiency and developing turnkey solutions that can be sold to developers. All solar manufacturers are reducing their exposure to the project development business, which was a windfall for a while but became a headache in the last few years. And manufacturers like Canadian Solar (CSIQ -5.01%), Hanwha Q-Cells (HQCL), and JA Solar (NASDAQ: JASO) are now too cheap to ignore. Long-term, the industry is maturing, and investors should take another look at where solar companies stand today. 

SPWR Chart

SPWR data by YCharts

Demand for solar is booming and isn't stopping anytime soon

2010 was the first year the global solar industry passed 10 GW of installations, and in 2017 it will likely pass 100 GW for the year. The growth has been driven by China and the U.S., but emerging markets like India, Africa, and the Middle East will play an important role in the future, despite having less than 10 GW of installations combined so far.

What's changed in the last few years is that solar adoption is no longer being driven by subsidies or mandates -- it's being driven by economics. The best example of that is in Saudi Arabia, where Masdar and EDF Energies recently bid 1.78 cents per kWh to sell electricity to the utility there. That's far less than it would cost to build a natural gas, coal, nuclear, or even wind power plant. Solar energy accounts for about 1% of global electricity production, so even with 100 GW installed in 2017 there's lots of room to grow. 

Solar panels installed in a desert with wind turbines in the background.

Image source: Getty Images.

Solar giants are differentiating themselves

What's killed solar investments over the past decade has been the rapidly falling cost of solar panels, driven by the commodification of the industry. Efficiency has recently become more important, and companies have been forced to upgrade their equipment and processes to keep up or be left in the dust. 

Only a handful of manufacturers in China have the scale and balance sheet to execute these upgrades, which is why former giants like Yingli Green Energy and LDK Solar have been left behind. Looking forward, companies with less than 4-5 GW of capacity, or weak balance sheets, will eventually be pushed out of the market because they won't have the scale to compete. 

The exception would be those developing niche products or superior technologies for niche applications. SunPower's high-efficiency panels aren't made on a GW scale, but they're high margin in space-constrained rooftop environments. But that doesn't translate to utility projects, where SunPower has built a partnership in China to expand its P-Series production to get to that 5 GW level by 2021. 

Solar stocks are cheap

Industry growth and emerging differentiation are important, but so is the price investors are paying for solar stocks. You can see in the chart below that First Solar is the only solar manufacturer trading above 0.55 times sales, which is an incredible stat for investors. 

SPWR PS Ratio (TTM) Chart

SPWR PS Ratio (TTM) data by YCharts

Long-term, if solar companies can generate even a 5% net margin then Canadian Solar, JA Solar, and Hanwha Q-Cells would all trade for less than 10x earnings, and SunPower would trade for less than 11x. 

If these companies are indeed consolidating power and margins rise in the future as they take market share and the overall market grows, this is an incredible value for investors. I think the future is bright for solar manufacturers and the market has underestimated their potential.