2 Top Renewable Energy Stocks in Solar Power

The United States leans on solar power to generate about 2.5% of its total electricity. That's not much, but the power source continues to run down the cost curve.

The levelized cost of electricity from solar panels and an energy storage system, including the investment tax credit (ITC), was about $37.50 per megawatt-hour (MWh) in 2018 and is expected to fall to $27 per MWh in 2022. If that economic tipping point is achieved, then it might cost less to build new utility-scale solar power plants than natural gas power plants. 

The same advances that usher in that lower-cost future will also trickle down to residential and commercial solar markets. More-efficient panels with fewer parts and more-durable materials could make homeowners and local businesses favor adding small-scale installations to their roofs. That would further extend the growth opportunity already present for SolarEdge Technologies (SEDG -4.29%) and Enphase Energy (ENPH -6.64%), which sell hardware that maximizes the value of solar modules. Here's why these two solar stocks are promising growth stocks as well.

Image source: Getty Images.

A global leader in solar hardware

The U.S. Energy Information Administration estimates that the amount of electricity generated by small-scale solar installations more than doubled from 2015 to 2018. The product portfolio of SolarEdge Technologies has played a significant role in that trend, which has accelerated over time. The company develops integrated inverter systems that maximize power output from solar panels and reduce the cost of electricity produced. Systems often include inverters (for converting direct current produced from solar panels into alternating current used by buildings), power optimizers, automated management solutions, and a cloud-based monitoring platform. 

SolarEdge Technologies has sold 40.8 million power optimizers and 1.7 million inverters throughout the world from its first commercial shipments in 2010 through the end of June 2019. Those installations have a cumulative capacity of 13,100 megawatts, which easily makes the company a leader in the space. The business has certainly capitalized. 

Data source: SEC filing. 

The business plowed money into sales, marketing, research and development, and administrative expenses in the first half of 2019, which led to a reduction in operating income. But it is still generating healthy amounts of cash flow. Much of the increases are related to the company's recent acquisition spree.

In the last six quarters, SolarEdge has acquired a provider of uninterruptible power supplies, a maker of lithium-ion batteries, and even a company that develops powertrain and electronics for electric vehicles. That shows the company is eager to maintain and expand its presence in the clean energy markets. With shares trading at just 17 times future earnings after a recent pullback, investors with a long-term mindset might find plenty to like about this solar stock.

Image source: Getty Images.

Newly profitable, and not looking back

Enphase Energy only recently began generating operating profits, but is well positioned for growth. It develops and supplies microinverter solutions that help maximize the electricity output from solar modules. The latest-generation IQ 7 microinverter boasts 97% efficiency and is 19% lighter and 17% smaller than the previous-generation hardware supplied by the company. Customers have been gobbling up the simpler system.

In the first half of 2019, the business grew revenue 60%, gross profit was up 92%, and operating cash flow grew 327% versus the year-ago period. Growth might have been even higher if Enphase Energy didn't run into component shortages caused by high demand. It has since addressed those bottlenecks, although that didn't keep the business from finally reaching profitable operations. 

Enphase, the leader in microinverters, delivered $24.6 million in operating income in the first six months of this year, compared with an operating loss of $3 million in the first half of 2018. It even met the long-stated "30-20-10" financial goal: 30% gross margin, 20% operating expenses relative to revenue, and a 10% operating margin. In fact, the business exceeded that with 34-17-17 in Q2. 

Investors might feel pretty confident that the company can stay on a promising growth trajectory. It is preparing to launch the first products with the next-generation IQ 8 microinverter, which boasts a 31% increase in computing power versus the IQ 7. That could allow for smaller, more efficient, and even simpler products for customers. Throw in the expected launch of residential energy storage products by the end of 2019, and this solar stock could have multiple growth opportunities driving it higher should the business capitalize.