According to Grand View Research, the global renewable energy market hit $1.1 trillion in 2022. The firm forecasts that the market will expand at a nearly 17% compound annual rate through the end of the decade. That would push it to $3.8 trillion by 2030.
That rising tide should lift all boats in the sector. However, Canadian Solar (NASDAQ: CSIQ), Stem (NYSE: STEM), and Brookfield Renewable(NYSE: BEPC)(NYSE: BEP) appear best positioned to capitalize on the renewable energy investment opportunity, according to a few Fool.com contributors. Here's why they think shares of these companies could skyrocket by the end of the decade.
The cheapest renewable energy stock on the market?
Tyler Crowe (Canadian Solar): Sometimes, the pricing decisions of the market confuse me. The current valuation the market has assigned to Canadian Solar is one of those instances. Today, the company's stock trades for 0.6 times book value. So you're buying $1 worth of assets on the books for only $0.60. By comparison, First Solar(NASDAQ: FSLR) trades for 2.7 times its book value, and Maxeon Solar Technologies(NASDAQ: MAXN) trades for 1.6 times its book value.
It's at this point that I should also mention that Canadian Solar has arguably had the best returns on invested capital among solar panel producers over the past decade.
CSIQ Return on Invested Capital data by YCharts.
I get that some parts of its business are less than ideal. Producing solar panels is a high-growth, low-return business that routinely gets whacked by short-term industry cycles. Also, the company has a project development arm that has resulted in lumpy annual results, and it has to carry those projects (and the debt associated with them) on its balance sheet until they are sold.
Even with these warts, the company is still generating decent rates of return, it has a reasonable balance sheet (the debt-to-capital ratio is 19.7%), and management intends to double panel production capacity between now and the end of 2024.
There aren't a lot of companies on Wall Street offered at deep discounts. Canadian Solar appears to be one of the few.
Helping solve the biggest challenge for renewables
Jason Hall(Stem): The biggest "problem" with the transition to renewable energy sources is intermittence. Electric utilities can't just order up wind and sun when they need to deliver power. However, massive declines in storage costs and increases in battery manufacturing capacity have started to help solve those problems. They have also helped utilities solve their demand problems.
But the law of unintended consequences never takes a day off, so those solutions are also creating a new challenge: how to manage all of those batteries to make the most of the stored energy.
This is where Stem comes in. The company sells and installs large-scale energy storage systems to utilities, grid operators, and large energy users, and then -- this is where the value is created -- helps them manage the storage and deployment of the stored electricity with its AI-powered Athena software, typically on long-term contracts in excess of 10 years. It also has an AI-powered solar asset management software, AlsoEnergy, that's growing quickly too.
Business is booming. Through the second quarter, revenue was up 39%, its contracted backlog has almost doubled in the past year, and it has begun showing signs that it could soon transition to profitability, with its adjusted EBITDA loss shrinking to $9 million, and its gross margin reaching 13%. It expects to be adjusted EBITDA-positive in the second half of the year, a big step forward for the bottom line.
But Stem has been burning cash since going public, and ended the quarter with $138 million in cash and short-term investments on the books. The good news is management says its large inventory build is about to start turning into cash in the second half of the year, and it expects to end 2023 with "no less than $150 million in cash and equivalents." If that proves true (and the backlog suggests that it is) then this could prove to be an absolutely perfect time to buy shares of this riskier stock for a massive payoff.
This industry leader is only getting larger
Matt DiLallo (Brookfield Renewable): Brookfield Renewable is already a global leader in renewable energy. It has a large-scale and diversified portfolio of renewable energy assets and decarbonization solutions.
The company has bold plans to supersize its portfolio by the end of the decade. Brookfield currently has 134 gigawatts (GW) of renewable energy development projects in its pipeline. That's enough capacity to offset over 95% of the annual emissions of a country the size of Australia while powering more than 18 million homes annually. It's also several times larger than its current operating portfolio of 32 GW.
Brookfield Renewable estimates that a combination of its development pipeline, inflation-indexed power prices, and margin enhancement activities will allow it to grow its funds from operations (FFO) by 7% to 12% per share annually through 2028. That would give the company ample power to follow through on its plans to increase its dividend (which currently yields 5.8%) by 5% to 9% per year. The combination of income and earnings growth could fuel total returns of 13% to 18% per year.
Brookfield also sees ample upside potential from future acquisitions. It believes that M&A activities could add more than 9% to its FFO per share each year through 2028.
A big factor driving M&A is its Brookfield Global Transition Fund strategy. The company has raised billions of dollars from investors to co-invest in various energy transition-related investments. For example, it's currently working to acquire Australian utility Origin Energy to transition the company's power generation from fossil fuels to renewables. That's one of three deals it has secured to power accelerated earnings growth in 2024 and beyond.
Despite all this growth potential, shares of Brookfield Renewable currently sit more than 35% below their 52-week high. I think that's a great starting point for a stock that should skyrocket by the end of the decade as it capitalizes on the massive renewable energy investment megatrend.
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Jason Hall has positions in Brookfield Renewable, Brookfield Renewable Partners, First Solar, and Stem. Matthew DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and First Solar. Tyler Crowe has positions in Brookfield Renewable and First Solar. The Motley Fool has positions in and recommends Brookfield Renewable and Stem. The Motley Fool recommends Brookfield Renewable Partners and First Solar. The Motley Fool has a disclosure policy.
