The global economy needs to invest a staggering amount of money to transition away from fossil fuels and toward renewable energy. The cost of decarbonizing the U.S. power system alone is an estimated $4.5 trillion, according to an estimate by energy sector research firm Wood Mackenzie. Given the need to pivot toward cleaner power sources, the renewable sector represents a multidecade growth opportunity for investors.
One company well positioned for the sector's bright future is SolarEdge Technologies (SEDG -0.86%), which currently focuses on making microinverters for the solar industry. Given the projected growth in solar, as well as the company's expansion into other markets like power storage and electric vehicles (EV), SolarEdge could be a big winner in the coming decades. That's why I recently added this solar stock to my portfolio.
What SolarEdge does
Solar panels capture some of the sun's energy and turn it into a form of electricity known as direct current (DC). The global power grid system, however, runs on alternating current (AC) since it's less expensive. Because of that, the solar industry needs to use inverters to convert DC electricity into AC.
Initially, solar companies would string several solar panels together with a central inverter at the end (known as a string inverter system). Although this is an inexpensive option, it's also the least efficient since issues with one panel affect the entire system's output. Another option is to install microinverters on every panel. While this increases efficiency, it's more expensive.
SolarEdge, in the meantime, developed a third option: power optimizers. These components, which get installed on each panel, help improve efficiency. Despite the fact that a system with power optimizers still requires a string inverter at the end, it's cheaper than using microinverters. That combination of increased efficiency over a string inverter system at a lower cost than microinverters gives power optimizers an edge.
In addition to manufacturing power optimizers, SolarEdge has made investments and acquisitions to branch out into new emerging technologies in other areas of the renewable sector. In 2018, the company bought Gamatronic, a leader in uninterruptible power supply (UPS), which provides emergency power to appliances (think along the lines of a backup generator). Last year, the company also acquired SMRE, which produces integrated powertrain technology and electronics for EVs. Earlier this year, it bought Kokam. That company makes lithium-ion cells and high-performance battery solutions, giving it additional inroads into the UPS and EV markets as well as exposure to the energy storage sector.
SolarEdge is building a well-rounded portfolio of products aimed at the future of energy. Supplying the solar industry with power optimizers as well as inverters remains its core business, and its extension into other emerging renewable energy-related sectors only adds to its appeal.
A look at the numbers
SolarEdge's focus on supplying the solar industry with much-needed components has been paying dividends. The company hauled in $306.7 million in revenue from that sector during the second quarter, up 35% year over year. Add in its sales to non-solar customers, and revenue was a record $325 million, up 43% year over year. Its gross margin from sales to that sector improved from 34.3% in the first quarter to 36.9%. In other words, its sales are growing increasingly more profitable.
Those trends should continue in the coming years. SolarEdge, for example, expects record revenue again for the third quarter -- it's projecting sales of between $395 million and $410 million. With annual global solar installations expected to increase from less than 100 GW in 2018 to around 125 GW in the early 2020s, according to Wood Mackenzie, SolarEdge's revenue from that sector should continue to rise. Combined with its growing upside from the accelerated adoption of EVs and energy storage, SolarEdge has a bright future.
On top of that, the company has a strong balance sheet. It ended the second quarter with a net $351.6 million of cash. It also generated a healthy $50.8 million of cash from operations in that quarter alone. As a result, SolarEdge has the financial flexibility to keep making investments in emerging renewable energy-related components to keep growing sales at an accelerated pace.
An exciting way to invest in the future of renewable energy
SolarEdge has a history of developing solutions that improve the efficiency and lower the costs of producing solar energy. That has it well positioned to continue to grow its sales and profits at healthy rates as that sector keeps expanding in the decades to come. Meanwhile, the company has started leveraging its strength in that market to invest in other emerging areas within renewable energy, which increases its long-term upside potential. That combination of solar-powered growth and intriguing exposure to adjacent sectors is why I recently added shares of SolarEdge to my portfolio.