What is it that makes a stock a "solar stock?" What is it that defines "best?"
In one sense, I suppose you could say that Elon Musk's Tesla (TSLA 3.27%) has been the best solar stock of the decade. After all, even if it's best known for its Model S, Model X, and Model 3 electric cars, Tesla also owns a solar energy business, building and selling equipment to harvest (solar panels) and store (electric batteries) energy from the sun. And if you're defining "best" as "producing the biggest stock profits," Tesla has been by far the best performing solar stock of the decade, growing 1,876% in value since its IPO on June 29, 2010 at an offer price of $17 a share.
But even as a lawyer, I was never a huge fan of open and shut cases. (Too obvious. Too boring.) So instead of focusing on Tesla, let's examine three companies that fit the bill as "solar stocks" in more interesting ways, and that have also done pretty well for their shareholders over the past decade: Synopsys (SNPS -0.11%), Applied Materials (AMAT 0.04%), and SolarEdge Technologies (SEDG 0.36%).
Based on a screen of several solar power-related companies and comparing their performance over the last 10 years, it turns out that -- aside from Tesla -- these three have been the best performers.
I first became familiar with Synopsys some two decades ago while doing legal work for the company. I was intrigued by the business, and I've kept tabs on Synopsys off and on ever since as it evolved from a relatively simple play on the software used to operate machinery manufacturing computer chips into a bona fide play on the solar energy market.
As a maker of software products used to design and test integrated circuits, Synopsys is best recognized as a supplier to the computer chip and LED industries. But semiconductors are integral to the operation of solar cells as well, and Synopsys offers multiple products supporting this industry, including:
- Its "Solar Cell Utility", which performs optical and electronic simulations for solar cell devices;
- A Solar Tracking Utility that simulates and analyzes the performance of solar collection systems; and
- The Sentaurus Technology Computer-Aided Design (TCAD) "for simulating solar cell characteristics to improve performance."
Synopsys doesn't break out its financial results by industry, but even what it does tell us indicates that the business is growing nicely. Revenue grew nearly 150% over the past decade, from $1.4 billion in 2009 to $3.4 billion over the past 12 reported months. Net income has more than tripled to $532 million. And free cash flow is coming along for the ride -- up more than 200% from $200 million in cash profit generated in 2009 to more than $600 million over the past year.
And the stock price? Since the end of 2009, Synopsys stock has recorded a gain of 555%, closing above $134 a share last week.
Another perhaps below-the-radar solar play worth highlighting here is Applied Materials. If Synopsys is far up the solar supply chain -- supplying the software that runs the machines that make the photovoltaics that form the cells that convert sunlight to energy -- then Applied Materials, which makes chip manufacturing machines, is at least one step closer to the solar end user.
It's also been a pretty terrific stock for investors to own this past decade. From 2009 to the last 12 months, Applied Materials nearly tripled its sales to $14.6 billion, and moved from a net loss ($305 million in 2009) to a net profit -- $2.7 billion. Free cash flow has risen in tandem, from about $84 million in cash generated a decade ago to just over $2.8 billion over the last four reported quarters.
Stock-wise, Applied Materials shares have also performed well -- up 313%. And yet, at a price-to-earnings ratio of less than 20, they remain significantly cheaper than Synopsys (which trades for more than 38 times earnings). That's surprising, given that analysts polled by S&P Global Market Intelligence have both companies growing earnings at roughly the same rate over the next five years -- 14.3% annually for Synopsys, and 14.5% for Applied Materials.
It may also mean that over the coming decade, Applied Materials has the better chance of delivering above-average profits to investors.
Last but not least, we come to SolarEdge -- incidentally, the only one of these three stocks that I own in my personal stock portfolio. Also incidentally, SolarEdge is the only one of the three that hasn't actually been publicly traded for a full 10 years.
SolarEdge held its IPO in March 2015 -- but it's already giving other solar stocks a run for their money. Despite having half the time to work with, it's up 304% in less than five years, and neck and neck with Applied Materials in delivering profits to investors.
How has SolarEdge done this? The maker of inverters that convert direct current solar-generated electricity into the alternating current that charges your iPhone has nearly quadrupled its sales since 2015, pulling down $1.3 billion in revenue over the last 12 months. Profits are up 5x in the same period -- $107 million -- and free cash flow has gone from barely breakeven to nearly $175 million generated over the past year.
Going forward, Wall Street analysts see SolarEdge continuing to outgrow other solar stocks. Its earnings are projected to grow 22% annually over the next five years. Whether that will be fast enough to justify the stock's heady 38x P/E ratio remains to be seen. But given the fabulous returns SolarEdge has already generated for stockholders, there's no arguing the company hasn't delivered in spades already -- and earned its place among the best solar stocks of the decade.