If you're just getting started on investing in renewable energy stocks, surveying the industry can be daunting. It includes companies focused on an array of alternative energy sources including wind, solar, and hydro, and they operate under a variety of business models from manufacturing to financing renewable energy projects.
To make it simpler for an investor to dip a toe in the water here, we asked three of our Foolish contributors to identify renewable energy stocks that would be great portfolio additions for investors less familiar with the industry. Their three very different responses were Bloom Energy (NYSE: BE), QuantumScape (NYSE: QS), and TPI Composites (NASDAQ: TPIC).
The hydrogen economy play
Travis Hoium (Bloom Energy): Investors who are just getting into renewable energy stocks hopefully have long time frames that will allow them to hold on to shares while the companies in their portfolios grow to maturity. With that in mind, my pick for new investors is Bloom Energy.
At its core, Bloom Energy is a fuel cell company. It makes solid oxide fuel cells, which run hotter and more efficiently than competing polymer electrolyte membrane fuel cells, making them perfect for utility-scale applications. While Bloom has used primarily natural gas and biofuels as a fuel source in the past, its future is in building the hydrogen economy with both electrolysis devices that generate hydrogen and fuel cells that consume it to create electricity.
Bloom Energy has slowly but surely made progress in building its business, increasing revenue and gross margins over the last few years. As it begins rolling out its hydrogen products, I think its revenue will pick up and the company will move closer to profitability.
If Bloom Energy can profitably make electrolysis and hydrogen fuel cell products, it could open up a hydrogen market that has the potential to be worth trillions of dollars. While there is an abundance of renewable energy and it's growing steadily cheaper to tap, that energy needs to be storable for later use, whether by utilities or in the transportation segment. Hydrogen is a natural solution. This isn't a business without risks, but investors with long time horizons and high tolerances for risk should consider Bloom Energy -- a leader in the hydrogen economy that could define the next century in energy.
Getting in on the ground floor
Howard Smith (QuantumScape): New investors presumably have many years ahead in their investing journeys. With that in mind, there are two possible paths that make sense to take. One is to build a base of quality, lower-risk holdings that can provide slow and steady growth and income over the decades. The other is to take risks while one can afford to be wrong.
Making mistakes early in one's investing career shouldn't hurt as much. First, you have ample time to wait for a declining stock to recover, or you can simply move on to another choice. And riskier picks generally come with the chance of higher rewards.
With major automakers and start-ups alike moving full force into the electric vehicle (EV) business, there should be plenty of winners in the fledgling renewable energy sector. One thing all of those automakers will need are EV batteries, and QuantumScape is on a path to commercialize what could become the industry standard.
The company is developing solid-state lithium-metal batteries that would have significant advantages over the current state of the art.
It has developed a ceramic material that can be used as a solid-state separator in a battery cell to significantly reduce charging times and improve both performance and fire safety compared to current lithium-ion batteries. The question is whether it will be able to build them profitably at scale, and the company is making progress on that front. In July, QuantumScape said it has successfully produced, and is now testing, its first 10-layer battery cells. This is the level needed to produce a commercially viable product.
Volkswagen (OTC: VWAGY) is both a financial backer and a prospective customer. And in September, QuantumScape said it has signed an agreement with a second global top 10 automaker. QuantumScape's original plan was to have the multilayer battery cell in testing by the end of 2021 -- so in that regard, it's running ahead of schedule. But even if all goes well, it's still about two years away from commercialization. It will also face competition in the battery market, and even before it has booked any revenue, the company has a market cap of about $10 billion. For investors in position to risk some capital in exchange for potentially huge rewards, however, QuantumScape is an EV stock worth considering.
An exciting story that is only just beginning
Daniel Foelber (TPI Composites): Whether you're looking at technology companies, utilities, or owners and operators, the renewable energy sector has layers of nuance that can be challenging to understand. TPI Composites is an independent manufacturer of wind turbine blades for original equipment manufacturers (OEMs) such as GE, Vestas, and Nordex. These OEMs produce the equipment for utility-scale wind energy projects, and to do so, they rely on a network of parts suppliers and component manufacturers like TPI.
TPI is an ideal pick for new investors because it's one of the few pure-play mid-cap wind energy stocks. It's also on the cusp of a big growth spurt, and it has suffered from a slew of setbacks, so expectations are relatively low.
The stock has fallen by more than 60% from its high as the company struggles to grow its top line and return to profitability. While it's easy to blame supply chain challenges or the COVID-19 pandemic as reasons why TPI hasn't lived up to expectations, the company needs to justify the cost of growing its manufacturing, research, and development facilities. That means that as macro issues are resolved over time, TPI will remain on the hot seat -- it will have to prove to long-term investors that their patience was worth it. In the short term, its growth-focused investments have taken a toll on its balance sheet and profitability. But given the long-term outlook for the renewable energy sector, there's reason to believe TPI's investments could ultimately be worthwhile.
When good companies slash their forecasts and reset expectations, their prior shareholders will suffer. However, such times can be great opportunities for new investors to open positions in those downtrodden companies. Prevailing negative sentiment has the effect of further discounting perfectly good companies. For example, when renewable energy stocks were riding high in 2020, many top-tier oil and gas companies saw their stock prices plummet. In 2021, energy has been the best performing sector of the market. Clean and green energy sources remain the future of the sector, but with crude oil and natural gas prices at or near their seven-year-highs, many oil and gas stocks are outperforming renewable energy stocks this year.
Wall Street dogs can turn into darlings in a heartbeat. For investors searching for growth stocks in the wind energy space, now is a good time to consider TPI Composites.
Something for every new renewable energy investor
Each of these companies is involved in a different segment of the renewable energy industry, but they're all being propelled by its incredible growth. Based on the macro trends, investors who buy and hold these renewable energy stocks through whatever turbulent periods might be ahead in the near term should benefit handsomely in the long term, because these companies could be among those defining the industry a decade from now.
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Daniel Foelber owns shares of TPI Composites and has the following options: short May 2022 $30 calls on TPI Composites. Howard Smith owns shares of Bloom Energy Corp and QuantumScape Corporation. Travis Hoium owns shares of Bloom Energy Corp. The Motley Fool owns shares of and recommends TPI Composites and Volkswagen AG. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.