Residential solar energy stocks are on fire right now and for good reason. According to the Solar Energy Industries Association the amount of installed residential solar has increased from 667 megawatts in 2010 to 21,001 MW at the midway point in 2021. And with fossil fuel prices on the rise, residential solar momentum should continue. 

Investors looking to jump into this industry have some great stocks to pick from and three of our contributors think SunPower (NASDAQ:SPWR), Enphase Energy (NASDAQ:ENPH), and SolarEdge Technologies (NASDAQ:SEDG) have what it takes to beat the market. 

Home with a large rooftop solar installation.

Image source: Getty Images.

The comeback solar stock

Travis Hoium (SunPower): For most of the last decade SunPower tried to be a leader in everything from solar manufacturing to installing giant solar farms. But it couldn't do everything well and has now sold off most of its noncore businesses for the business that's always performed the best and that's residential solar. 

SunPower has the tools to quote, install, monitor, and control residential solar installations and has long worked through dealer partners to expand its presence. But in October the company made a big splash by buying Blue Raven Solar, a leading residential solar installer. Instead of just working with partners, SunPower is now going to employ the sales and installation teams in some parts of the country. The vertical integration strategy has been successful for companies like Sunrun and could be for SunPower, too. 

What I think separates SunPower from the competition is its exclusive deal with Maxeon, formerly its manufacturing arm, to buy high-efficiency solar panels and its ability to offer different financing options, while companies like Sunrun focus entirely on solar power purchase agreements and leases. This flexibility will give customers more choice, which will be important as solar installations start to include more energy storage and EV charging options. The tailwinds are behind residential solar and I want to own the company with the direct customer relationship, and that's SunPower. 

Supplying the growing solar trend

Howard Smith (Enphase Energy): Solar has been the fastest growing source of new electricity generation in the nation over the past decade. To reach a mostly decarbonized electricity sector by 2035, that pace will still need to accelerate significantly over the next decade, according to an August 2021 U.S. Department of Energy report.

Enphase Energy supplies microinverters and other technology for residential and small commercial solar systems. Microinverters convert the DC power at the solar panel into the AC power used in the home or business. Enphase's business was booming prior to interruption caused by the pandemic, and the growth rate has picked back up so far in 2021. The below table shows the company's microinverter shipments and accompanying revenue for the last four six-month periods. 

Metric

H1 2021 H2 2020 H1 2020 H2 2019
Microinverter shipments 4.82 million 3.73 million 3.10 million 3.91 million
Revenue $617.8 million $443.3 million $331.1 million $390.1 million 

Data source: Enphase Energy financial reports. 

The company also recently reported its third-quarter sales increased 11% sequentially over the second quarter, and it guided fourth-quarter revenue would grow another 13.7% at the midpoint of its range. So those trends should continue. 

The major catalyst for Enphase's growth is the secular global trend of increasing renewable energy generation. And passage of an infrastructure bill in the U.S. would only help propel that growth. Whether that additional spending comes to fruition or not, Enphase has prospects beyond the U.S. market, too. The company recently expanded into Brazil and Italy, and it has just launched the battery storage component for its system in Belgium. The Encharge battery storage systems were already available to customers in Germany and North America.

For investors, that growth comes at a price. Its forward-looking price-to-earnings ratio is a lofty 83, according to data by YCharts. But that has come down from earlier in 2021 through both company performance and share price depreciation. Enphase shares have declined more than 17% from its January highs, making now a good time for investors to look closer at owning a part of the expected growth in solar power. 

The future has never been brighter for SolarEdge

Daniel Foelber (SolarEdge): Led by residential solar companies, solar stocks have been on an absolute tear over the last month.

SEDG Chart

SEDG data by YCharts

As Howard mentioned, Enphase has led the charge higher, but SolarEdge, its main competitor, could be close behind when it reports Q3 earnings on Tuesday.

After a choppy 2020 that saw declining top- and bottom-line growth rates, interest rate risks, and COVID-19-related headwinds, SolarEdge has turned things around in 2021 and is showing no signs of slowing down.

The company reported record-high revenue in Q2 2021, impressive profitability, and notched a 32.5% gross profit margin, which is in line with its typical range of 30% to 35%. 

For Q3, management expects between $520 million to $540 million in revenue, which would be a new all-time record, a 10% increase over Q2's record, and a staggering 57% increase over Q3 2020. SolarEdge expects to notch an adjusted gross margin between 32% and 34%. 

SolarEdge's revenue growth rate is impressive, but the biggest standout is arguably the company's ability to sustain a high gross margin even as it rapidly expands its top line. This characteristic bodes well for SolarEdge to gradually become more profitable in lockstep with the growing residential and commercial solar markets.

Even if SolarEdge underwhelms Wall Street with worse-than-expected Q3 figures, the company has a strong management team and industry-leading position that should make it a long-term winner for years to come

Residential solar is in growth mode

These companies are clear leaders in the residential solar industry and they're back to growing their businesses after an uncertain 2020. With opportunities to grow in geography and the market share of homes, the future is bright -- and that's even before we consider the growth potential for new technologies like energy storage and electric vehicle charging. With all that's going on in solar, this is a great place to be invested today. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.