Despite the bright prospects for solar energy in the long term, the erratic financial performance of solar companies is a major concern for investors. Hundreds of solar companies in the U.S. have gone bust in the past decade, primarily due to intense competition on the pricing front.
But as always, there are companies that have shown exceptional growth. Let's look at two such stocks.
Top renewable energy stocks
Solar companies form a sizable chunk of the universe of investable renewable energy companies. However, not all solar companies are the same. Some make panels, some make specialized components such as inverters or trackers, and others are involved only in solar installations.
The above graph shows the quarterly gross profit margins for eight top solar stocks. Enphase Energy generated a gross margin of 40.1% in the first quarter of 2022. Enphase Energy's gross margins have been the highest among the top solar stocks over the last three years. SolarEdge generated a gross margin of roughly 29% in the fourth quarter of 2021.
Both the companies were able to translate the high gross margins into bottom-line profits.
Enphase Energy generated a healthy margin of 11.7% in Q1 2022. SolarEdge's margin for Q4 stood at 7.4%. In comparison, margins for Array Technologies and Sunrun are negative, while those of Canadian Solar and JinkoSolar are very thin.
Factors driving the strong margins
Enphase Energy and SolarEdge's performance is impressive, considering that solar companies have long found it difficult to compete on the pricing front with low-cost Asian manufacturers. The two companies compete against each other in the solar inverters as well as the storage batteries market. They also face competition from traditional inverter makers, including SMA Solar Technology, ABB, Huawei Technologies, Fronius International GmbH, and several Chinese inverter manufacturers.
The biggest factors that differentiate Enphase Energy and SolarEdge from other players are the technologies behind their products. Enphase Energy's microinverters and SolarEdge's inverters with optimizers not only offer significant advantages over other available inverter options but are also very cost-competitive.
Quality products help Enphase and SolarEdge grow their sales while also commanding healthy margins. Differentiated offerings with superior technology help these two companies stand out from the competition making their stocks attractive.