We recently compiled a list of the 10 Best Solar Energy Stocks to Invest In. In this article, we are going to take a look at where SolarEdge Technologies, Inc. (NASDAQ:SEDG) stands against the other solar energy stocks.

Favorable costs and government policies have driven growth in the solar industry over the last decade. However, things took an unexpected turn as the overall sector came under pressure in 2023 due to the high interest rate environment, making it difficult and expensive to acquire cheap capital to accelerate growth. Tighter financing and policy shifts contributed to the more than 100 bankruptcies experienced in the solar sector.

Billed as one of the biggest markets in the solar industry, California was one of the hardest hit owing to the new net metering rules that barred people from accumulating credits higher than annual consumption. The fact that NEM 3.0 results in much lower compensation for electricity customers has resulted in reduced system economics, significantly affecting the sector. The policy change was one of the factors behind an 80% decrease in rooftop installation volume.

While demand for solar energy continues to grow owing to the transition to cleaner energy sources, solar industry stocks have remained under pressure. Solar stocks experienced an average drop of about 30%, underperforming the S&P 500, up by more than 20%. The underperformance could be attributed to, among other things, the policy shifts that affected most of the company's operations, resulting in some filing for bankruptcy. The high interest rates made the business untenable, given the high borrowing costs.

Fast forward, the outlook remains strong and in favor of solar stocks. The 10 best solar energy stocks to invest in are companies well positioned to benefit as the US Federal Reserve moves to cut interest rates. Lower interest rates should result in affordable borrowing costs that should allow the companies to borrow in a bid to ramp up their operations, either on the installation of solar panels or manufacturing to meet growing demand. Additionally, lower interest rates amid declining inflation should bolster consumer purchasing power, making it easier for most of them to invest in installing solar panels, which should benefit the sector.

Given that less than 4% of all US power generation comes from solar, the growth opportunities are tremendous as more people and businesses push for clean energy. Over the next two years, solar and wind energy are expected to be the driving force behind US power generation. Likewise, solar power generation is expected to grow by 75% to 286 billion KWh by 2025 from 163 billion kilowatt-hours in 2023

The expected growth has to do with solid solar demand as power demand surges and outpaces the growth of other electricity sources. The fact that solar energy accounted for just 3.9% of the nation's power grid in 2023 underscores the tremendous opportunities for growth for the ten best solar energy stocks to buy right now amid the transition from fossil fuels.

Last year alone, there were just over 1,000 gigawatts of solar power seeking grid connectors, up 14 times the 79 gigawatts of natural gas. Solar demand continues to outpace other energy sources partly because it is becoming cheap. For instance, solar for large utility projects costs between $29 and $92 per megawatt hour compared to costs of between $45 and $108 for combined cycle gas plants.

In addition to reduced costs, solar panel technology has improved significantly, characterized by greater solar efficiency fueling commercial customer demand. While solar panels could only convert 10% of the sunlight they captured, technological advancement has given rise to panels with conversion efficiencies that exceed 25%. Since photovoltaic systems can now convert a quarter of their sunlight, solar energy has become an attractive option for homeowners and businesses.

Given the cost benefits, the US solar market is growing at a compound annual growth rate of 16.48% and is projected to hit highs of 352 gigawatt-hours over the next five years (according to estimates by Mordor Intelligence). Declining solar panel costs and supportive government policies should be the catalyst driving the growth. Amid the growth, demand for solar microinverters, devices used to convert DC energy produced by solar panels into AC energy, is expected to grow.

While robust growth in the US solar market presents tremendous investment opportunities, the threat Chinese companies pose cannot be ignored. China has already unveiled its solar energy might, having installed more solar panels in 2023 than the US has in history. The country accounts for 80% of the global solar panel market share. The push into solar and wind energy is part of China's push to be carbon neutral by 2060.

Faced with the threat of cheaper imports, the US has already introduced subsidies to counter China in producing more affordable solar panels. In addition, it has increased the tariff rate for solar cells from 25% to 50% to protect local manufacturers from cheaper Chinese imports.

Similarly, Microinverters have become indispensable components driving solar power systems' efficiency, reliability, and flexibility. They are increasingly being installed at the level of individual panels to offer independent optimization, reduced power losses, and enhanced monitoring capabilities. The installation of each panel has been one of the factors fueling demand on a global scale. Likewise, the demand for solar microinverters is growing at a CAGR of 18.1%, and it is projected to hit highs of $5.7 billion by 2032, according to estimates by Future Market Insights.

The economic argument for solar energy as an alternative energy source has strengthened recently as big tech companies seek clean energy to power their data centers. The artificial intelligence revolution has triggered a strong demand for power as most of its operations are power intensive. Consequently, tech giants have been investing in solar and wind power to ensure a reliable supply of clean energy away from fossil fuels.

Tech giants represent nearly 40% of the demand for clean energy for utility-scale projects in the US. Likewise, demand from these companies is expected to grow exponentially as artificial intelligence operations in data centers require ten times more electricity than a typical data center. The expected and strong demand for clean energy is one reason to be bullish about solar energy stocks.

Our Methodology

While solar energy is expected to make up 58% of new electricity generation installed in the US in 2024, exciting investment opportunities should crop up. To compile our list of the 10 best solar energy stocks to invest in, we used the top 20 stock picks of the Invesco Solar ETF (NYSE:TAN) ETF that are traded on American stock exchanges and ranked them based on their upside potential. We also mentioned the number of hedge funds that had bought these stocks in Q1.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A technician installing a communication device in a large solar energy system.

SolarEdge Technologies, Inc. (NASDAQ:SEDG)

Hedge Funds Holding Stakes: 17

Upside potential as of August 2, 2024: 88%

SolarEdge Technologies, Inc. (NASDAQ:SEDG) is one of the 10 best solar energy stocks to invest in to gain exposure to the burgeoning solar microinverter landscape. The company designs, manufactures and sells optimized inverter systems that enable the generation of optimized solar energy from solar photovoltaic installations.

SolarEdge Technologies, Inc. (NASDAQ:SEDG) boasts a diversified product line that includes inverters, power optimizers, and cloud-based monitoring systems. While the company initially targeted the residential market, it currently addresses the needs of the commercial market. While SolarEdge Technologies, Inc. (NASDAQ:SEDG) is down by about 20%, it offers a three-year average sales growth of 15.9%.

The number of hedge funds that hold stakes in SolarEdge Technologies, Inc. (NASDAQ:SEDG) dropped to 17 in Q1 2024 from 32 as of the end of last year, according to Insider Monkey. Based on 25 Wall Street analysts, SolarEdge boasts an average price target of $49.95, implying 88% upside potential from current levels.

Overall SEDG ranks 1st on our list of the best solar energy stocks to buy. You can visit 10 Best Solar Energy Stocks to Invest In to see the other solar energy stocks that are on hedge funds’ radar. While we acknowledge the potential of SEDG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SEDG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.