Electric vehicle (EV) stocks have been on fire for nearly two years now as electric drivetrains take market share from conventional vehicles. And that's driven a lot of EV stocks to staggeringly high values even if companies haven't delivered any product yet.
If the price of EV stocks has you nervous, but you still want exposure to clean energy investments, three of our Fool.com contributors have picks that could provide value and growth for your portfolio. First Solar (FSLR 2.85%), Enphase Energy (ENPH 1.43%), and SolarEdge Technologies (SEDG 0.37%) are at the top of our list and for good reason.
Image source: Getty Images.
The value solar stock
Travis Hoium (First Solar): If you're looking for a cheap renewable energy stock, First Solar should be one of the first places you look. The company has a $9.1 billion market cap, projected a $1.35 billion to $1.45 billion net cash balance at the end of 2021, and is doubling solar panel production over the next three years.
While the solar panel industry may not be high growth like EVs today, it's much more mature, and the competition between companies is getting weaker. That means margins are going up as the remaining competitors build economies of scale. You can see this playing out in First Solar's margins and income trends.
FSLR Gross Profit Margin data by YCharts
When it comes to growth, there's a lot to like about First Solar. I mentioned that the company is doubling production over the next three years, mainly in the U.S. where it doesn't have to pay tariffs like most of its competitors. But we also need to remember that First Solar has a long history of improving its thin-film technology to improve efficiency and lower costs. As scale grows, these technology improvements should push margins even higher.
The solar industry is still in its infancy, providing about 2% of the world's electricity, which means there's a lot of growth potential ahead. First Solar is riding that wave of growth, and for investors, it has a reasonable price, great balance sheet, and great cash flow, which not many EV companies can say today.
High-growth with real earnings
Howard Smith (Enphase Energy): It's hard not to forget that much of the recent hype with EV stocks comes with companies that have yet to report actual earnings. Some are barely even recording sales as of yet. But solar technology company Enphase Energy also offers high-growth potential while already generating earnings and strong free cash flow.
In its third quarter, Enphase reported just over $100 million in free cash flow. That came from record quarterly revenue of $351.5 million. And 2021 will be the third consecutive year the growing company has generated real earnings. Many EV stocks are still years away from showing positive net income.
Because it's still a young company, Enphase isn't experiencing bottom-line earnings that are consistently growing. In the company's Q3 conference call for investors, Enphase CFO Eric Branderiz stated, "We continue to invest significantly in R&D to further our competitive advantage...We also ramped up our marketing spend in the back half of the year with new product launches and brand awareness."
But investors can see the strength in the underlying business with its growing revenue and profit margin. The company estimates it will report another record in Q4 with revenue around $400 million, which would represent an increase of over 50% year over year. Investors who want a high-growth name in the renewables sector should look into Enphase stock after its recent correction.
Buying best-in-breed businesses
Daniel Foelber (SolarEdge Technologies and Enphase Energy): 2021 wasn't exactly a great year for renewable energy stocks. Quite the opposite in fact. Solar stocks were one of the best performing industries in 2020 as low interest rates, sustained growth, and a massive push away from oil and gas toward alternative energy made the industry one of the few bright spots in an otherwise floundering market.
2021 flipped the script: Oil and gas stocks were the best performing sector in the S&P 500; the Invesco Solar ETF (TAN 0.91%) fell around 25%; and leading companies like SolarEdge and Enphase underperformed the broader market.
ENPH Total Return Level data by YCharts
Investors interested in decarbonization may be tempted to simply buy a solar exchange-traded fund (ETF) to diversify risk and capture upside. But there's an argument for sticking with industry leaders instead. As competitors in the solar inverter, power optimizer, and energy storage space, SolarEdge and Enphase both have their own strengths and weaknesses when it comes to their technology and their core businesses.
For example, SolarEdge has a better track record for consistently strong gross margins, profitability, and healthy growth, whereas Enphase is a faster-growing but more expensive company from a price-to-sales (P/S) and price-to-earnings (P/E) perspective. While I see the merit in Howard's Enphase pick, I think a 50/50 split of both Enphase and SolarEdge gives an investor two leading companies that should do just fine as the energy transition grows over the long term.
Growth and value in clean energy
These companies are all growing and trading at much more reasonable values than many EV counterparts. As the solar industry grows, these stocks should do well, and that's a big reason we like First Solar, Enphase, and SolarEdge as clean energy investments today.
