There has never been a better time for the solar industry to bask in the glow of its accomplishments.

Solar power is more plentiful than ever and more competitive than ever with fossil fuels.

This year the U.S. will add more utility-scale solar generating capacity than it will from any other power source, though that’s largely the result of tax breaks that had been scheduled to expire in December until a last-minute extension.

Homeowners and businesses continue to install roof panels at a dizzying pace.

Yet solar stocks have been left to molder in the dark, drained by a total eclipse of investor enthusiasm.

That’s because, while solar capacity additions have surged, the underpinnings of that growth are now in doubt.

The 30% federal tax credit for solar installations is now scheduled to gradually sunset starting in 2020, so the recent rush to beat its expiration is unlikely to be repeated for a few years still.

Meanwhile, residential rooftop sales and leases have seen their growth rate flatten of late by regulatory pushback from utilities.

Nevada is no longer requiring utilities to buy the surplus power generated by rooftop panels at the retail rate, while allowing them to charge solar users more for grid upkeep, causing two leading photovoltaic panel installers to leave the state. Hawaii has made similar changes. In Massachusetts, the rates at which residential customers can resell solar power to utilities have just been slashed by 40% for future installations.

Tale of Two Losers

The utility counter-strike has certainly slowed the advance of leading residential installer SolarCity (NASDAQ: SCTY), which blamed the resulting uncertainty, among other factors, in lowering its annual installation guidance by 12-20% earlier this month. Its stock is down 60% since mid-December.

Doubts about the sustainability of residential sales and leases were also at the heart of SunEdison’s collapse, after that company overbid for a rooftop panels marketer.

Darkness at Noon

Between the slaughter of the bellwethers and the state-level reverses, the solar industry is now embroiled in one of its periodic growth scares. Growth investors have headed for the hills, and the value-minded ones have been in no rush to step in.

Inevitably, the sentiment shift and market punishment have been entirely disproportionate to the fundamental issues facing the industry. Solar City still expects to install 15% more solar power capacity this year than last year, and double its installations in 2014.  

The residential solar market on the whole should grow faster than 15% this year, thanks to thousands of small-time installers and do-it-yourselfers who’re finding it easier than ever to cut out the middleman and capture more of the savings. As solar power costs continue to drop faster than those of any other energy source, the value proposition of rooftop panels should remain appealing even in the face of declining subsidies.

Where the Growth Went   

The solar industry isn’t defined by SolarCity or SunEdison, as should be apparent from the results reported recently by SolarEdge Technologies (NASDAQ: SEDG), the inverter maker we introduced and added to the Growth Portfolio last week.

The company reported a 45% year-over-year revenue gain for its quarter ended in March, when it shipped more than 52,000 inverters, up 35% in a year’s time.

Source: SolarEdge presentation

Solar City accounted for nearly 25% of SolarEdge’s revenue in fiscal 2015, but less than 10% in the most recent quarter. The implication is that sales to SolarCity shrank as much as 60% over the last year, while those to everyone else jumped more than 70%.

On the May 9 conference call following the release of quarterly results, SolarEdge’s CEO acknowledged “a general slowdown of residential PV business in the U.S., reflected by reduced rates of installations of large players in the industry.” The company is compensating by increasing sales to commercial projects and to national distributors.

At the midpoint of its forecast for the current quarter, revenue would be up 3% sequentially and 32% year-over-year.

The SolarEdge Difference

Solar inverters convert the direct current produced by the photovoltaic cells into the alternating current required by the electric grid and home appliances. Traditional inverters require relatively uniform power output from each photovoltaic module linked to them in uniform strings of such modules. This often limits the number of modules that can be installed and their efficiency.

Micro-inverters solve some of these problems by converting the current produced by a single module, but at a significantly higher cost for the power produced and a loss of the traditional inverters’ economies of scale.

SolarEdge uses microelectronics and software to track and optimize each module’s output, which is then converted into AC power by a single system-wide inverter. This tends to improve system efficiency at a lower scaled cost than most competitive offerings can manage. The proof of SolarEdge’s technological lead is in its rapidly growing sales and expanding gross margin, now above 30%.

In the coming months the company will roll out its new generation of inverters, dubbed HD-Wave. These use scaled down electronics and pumped up algorithms to generate a cleaner sine wave than the current offering, requiring lower magnetic content and fewer cooling elements, which tend to drive up the size and cost of inverters. An HD-Wave inverter weighs less than half as much as its comparably performing predecessor. SolarEdge likens the leap in technology to that separating flat-screen TVs from their bulky ancestors.

Source: SolarEdge presentation  

HD-Wave inverters will retain such advantages of SolarEdge’s current technology as nearly instantaneous system shutdown in the event of failure, remote module monitoring and more efficient  power storage architecture.

The company has plenty of competitors, of course, from European giants like SMA Solar Technology and ABB to low-cost Chinese copycats. U.S. micro-inverter maker Enphase Energy (NASDAQ: ENPH) has been a bitter rival (and its share price suggests a largely vanquished one.) While no lead in this fast-changing industry is safe, SolarEdge’s solution has rapidly gained it market share, to the point where it’s now likely a leader in inverters for the U.S. residential market.

This is a somewhat dubious distinction given the recent slowdown in that sector. SolarEdge relies on the U.S. for more than 70% of its revenue, and residential accounts for perhaps two-thirds of that. Europe provided 20% of revenue last year.

But even a slowly growing U.S. residential market is a huge and highly fragmented one, leaving plenty of room for SolarEdge to grow by continuing to increase its share.

Promised Land Profits  

The company is already profitable, converting 18% of the most recent quarterly revenue into operating income. SolarEdge has no debt and trades at 10 times the most recent quarter’s annualized EBITDA. Operating income has doubled over the last year.

Based in Israel, the company was founded a decade ago by alumni from one of the national research labs, and its lean cost structure and focus on the bottom line may reflect the home country’s do-more-with-less ethic. SolarEdge’s venture capital backers retain nearly half the equity, while the rest was floated in an initial public offering 14 months ago.

After doubling in less than three months following the IPO, the share price is now only marginally higher than its close on the first day of public trading, when SolarEdge had only half the current revenue and was operating near breakeven. The stock is down nearly 20% over the last month, though it’s reclaimed the bulk of its losses following the quarterly report.

Short interest stands at 19% of the float, occupying the middle ground between SolarCity (41%) and FirstSolar (NASDAQ: FSLR) at 6%.

The big near-term threat here is that the slowdown in residential installations turns into an outright decline, swamping SolarEdge’s share gains and commercial market inroads. The longer-term risk is that someone invents a better mousetrap, consigning the company to the long list of deposed leaders in this volatile industry.

But such worries seem to be pretty fully discounted by the current price, which is not at all reflective of the likelihood that SolarEdge’s rapid growth can continue. We like the setup. Buy Growth pick SEDG below $25.