Oil stocks have had a rough go of it in 2020 as oil prices went negative for a short time and demand across the world plummeted because of COVID-19 economic shutdowns. And that's only deepened the financial challenges many companies have faced over the past decade.
Even though oil is struggling, other parts of the energy industry are thriving. Renewable energy is booming and infrastructure continues to be needed to keep the world moving. That's why three Motley Fool contributors think SunPower (SPWR -2.21%), Enphase Energy (ENPH -2.46%), and Brookfield Infrastructure Partners (BIP 3.35%) are energy stocks that still have a bright future.
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The distributed solar giant
Travis Hoium (SunPower): SunPower is one renewable energy company that's been searching for the right strategy for a decade. The company started as a high-efficiency solar manufacturer and leveraged that technology to become a developer of everything from residential solar projects to some of the largest solar farms in the world. But today's solar industry is about specialization, not vertical integration, and SunPower is adapting to that reality.
SunPower sold off its utility-scale solar arm, its microinverter business (to Enphase), and this month will spin off most of its solar manufacturing unit, Maxeon Solar Technologies. What will be left is a residential and commercial solar solutions provider. SunPower isn't an installer of residential solar projects, but it provides tools for installers that allow them to provide quotes quickly, build standardized installations, and utilize a monitoring platform. It's also added energy storage, where it can add value to smaller installers because storage needs to be controlled by a company with the scale to make it economically viable. SunPower has already started building virtual power plants with its network of energy storage installations and that'll continue to grow.
Add it all up and SunPower is providing a needed technology solution to small installers around the U.S. It's an asset-light model because SunPower doesn't "own the trucks" but it has the potential to lead to the biggest market share in the industry given the large reach the company can have.
In commercial solar, SunPower has a dual strategy of providing solutions to other installers and also going directly to customers itself. Again, its quoting, design, monitoring, energy storage, and financing solutions make this a valuable company for installers.
SunPower's finances have been a mess for years, but now that it's focusing the business on one segment of the market, the business should become clearer and more profitable. Gross margin for the non-Maxeon business increased from 9.4% in the second quarter a year ago to 17.7% in the second quarter of this year, despite the impact of the coronavirus pandemic.
I think the new focus for SunPower will finally lead to the profitable business investors have been hoping to see for years.
A sunny outlook
Howard Smith (Enphase Energy): A critical shift in Enphase's business occurred when the company acquired the microinverter business from SunPower in 2018. The move cemented an increase in market share of the residential solar business as Enphase became the microinverter supplier for SunPower's solar panels. Microinverters are the devices that convert power at the panel into the AC power used in the home. In addition to added sales, it provided a strong improvement in profitability for Enphase.
ENPH Revenue (Quarterly) data by YCharts
Enphase has expanded its gross profit margin from under 30% prior to the acquisition to almost 40% in its most recent reporting periods, including the pandemic-impacted second-quarter results just announced. Sales also have continued to grow significantly. The company more than doubled quarterly microinverter shipments in the last year, before a drop in the recent second quarter caused by the pandemic.
Enphase has more than one path for growth. The solar market itself will continue to grow. Solar power generation grew globally by 22% in 2019, and the International Energy Agency (IEA) estimates it will more than quadruple from those levels by 2030. The company is also moving more into the commercial market for growth. It has announced recent partnerships for commercial projects in the U.S. and an agreement to grow commercial use in Australia. It has also been expanding its residential business internationally. With a growing market and plenty of room for the company to maintain, or even increase, market share, it could be a good time to buy Enphase Energy.
A bigger opportunity than just energy
Jason Hall (Brookfield Infrastructure): Natural gas and electricity transmission and distribution is a big part of Brookfield Infrastructure's business. Moreover, I expect the asset owner and developer to invest a lot more money in both in the years to come, and that they'll provide wonderful sources of income growth for investors along the way.
But Brookfield Infrastructure offers investors a lot more than just energy investments. The company also owns and operates water, transportation, and telecommunications infrastructure, giving it exposure to a broad swath of the things that make business, commerce, and modern life possible.
Investors have profited enormously from the company's investments, too. Since going public right before the global financial crisis of 2008, Brookfield Infrastructure Partners has delivered 540% in total returns, more than double the S&P 500 total returns over the same period:
BIP Total Return Price data by YCharts
But I think the best is yet to come. Despite very real concerns that the U.S. middle class is losing ground, the global middle class is exploding. Over the next decade, some 1 billion people will join the middle class, and largely in emerging economies that will need to add trillions of dollars of the kind of infrastructure Brookfield is really good at operating.
With an incredible track record as an operator, developer, and acquirer, and a long history of dividend growth, Brookfield Infrastructure is a good reason for energy investors to ignore the oil patch.
Oil is not the future of energy
Renewable energy is clearly the future of the electricity industry, and Jason's pick of Brookfield Infrastructure plays on the growth of everything from renewable energy to water needs. But all three of these stocks have a brighter future than oil stocks and that's why they're on the top of our list today.
