Too many discussions about renewable energy and climate change slant toward pessimism and fear, but the numbers clearly show that the United States is rapidly decarbonizing its economy.
The nation has reduced carbon emissions by more than any other this century. By 2030, the United States could generate as much as 30% of its total electricity from onshore wind and utility-scale solar, and 70% from all zero-carbon energy sources combined. If electric vehicles take off as expected this decade, then America's decarbonization efforts are on track to meet previous near-term commitments to the Paris Agreement or Clean Power Plan -- even without any coherent federal action.
The trends strongly suggest that individual investors have at least some exposure to renewable energy stocks. Two businesses for closer examination in early 2020 are low-carbon power generator NextEra Energy Partners (NEP 0.19%) and solar hardware leader Enphase Energy (ENPH 1.72%).
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A rare bout of uncertainty was handled with ease
Pacific Gas and Electric Company, or PG&E, was saddled with much of the blame for deadly wildfires that ripped through northern California in 2017 and 2018. The insurmountable liabilities related to those catastrophes forced the electric utility to file for bankruptcy in early 2019. It also forced NextEra Energy Partners to scramble in an attempt to contain the fallout, as the partnership sold electricity to PG&E in renewable energy contracts that many feared would be significantly altered in bankruptcy court.
The partnership handled the uncertainty remarkably well. In fact, less than two months after PG&E filed for bankruptcy, NextEra Energy Partners announced multiple transactions to replace cash flow generation from PG&E-related assets (just in case) and achieve its full-year 2019 growth objectives. The partnership doesn't have to acquire any new assets until 2021 to meet its stated goal of growing annual distributions by at least 12% per year.
That doesn't necessarily mean the business will lay dormant until 2021. NextEra Energy Partners has a history of maximizing its relationship with NextEra Energy Resources (NEER), the power-generation arm of parent NextEra Energy. A cozy relationship allowed the partnership to end 2019 with 5,330 megawatts of renewable energy assets. According to investor presentations, the growth plans at NEER alone could allow the partnership to grow its footprint 12% per year through 2024.
That's promising -- and it doesn't include the recent reawakening of the partnership's natural gas pipelines business. While the ability to act on those ambitions depends on securing new financing, the business model allows NextEra Energy Partners to borrow based on cash flow generation, which is relatively stable thanks to the nature of electricity supply contracts inked with customers. That provides confidence that this renewable energy stock can continue to beat the S&P 500 over the long haul.
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Overpriced? Consider the long-term product portfolio
A combination of changing electrical codes, the rollout of better technology, and the beginning of the end of the investment tax credit (ITC) for solar projects allowed Enphase Energy to finally profit from its leadership in solar microinverters last year. Shares soared 452% in 2019, although there was plenty of volatility in between as investors oscillated on their definition of the word "overpriced."
The same nervous energy is gripping the stock at the start of 2020. Shares trade at 83 times earnings from the last 12-month period and at 30 times estimated future earnings. The solar stock sits at 25 times book value, primarily because the company's balance sheet lists few assets. But is the stock actually expensive if investors take the long-term view?
Enphase Energy broke out last year thanks to great market traction for its latest-generation IQ 7 microinverters. In the first nine months of 2019, revenue grew 85% year over year and operating income jumped to $58.3 million, up from an operating loss of $3.4 million in the year-ago period. There were some signs that fourth-quarter revenue was going to be weaker than investors might have expected, but the business is well positioned to continue growing in the years ahead.
In November, the company launched its IQ 7A microinverter, which is specially designed for high-capacity 450-watt solar panels. Those same panels are expected to play a pivotal role in significantly driving down the cost of electricity generated from solar assets both large and small in the next few years, which suggests Enphase Energy could lean on the new microinverters for near-term growth.
Investors also cannot overlook the upcoming launch of IQ 8 microinverters, which are smaller and more powerful than IQ 7 products. The next-generation platform can simplify power management devices, enable entirely new system management applications, and lower module-level costs. There's also the long-awaited ramp of the Encharge energy storage portfolio, which will be closely watched in 2020.
In other words, analysts worried that the company's market share in microinverters is unsustainably high are missing the bigger picture. Even if Enphase Energy sees a dip in its relative market share, the absolute opportunity in microinverters from hypergrowth in the solar industry will continue to expand. What's more, the company can leverage its brand name and customer relationships to build business in additional solar hardware products, such as module management and batteries. Given the rampant growth of small-scale and utility-scale solar in the United States, this renewable energy stock might be well worth its premium.
