We recently compiled a list of the 10 Best Green Energy Penny Stocks to Buy Now. In this article, we are going to take a look at where Stem (NYSE:STEM) stands against the other green energy penny stocks.

Exploring Green Energy 

Green energy comes from naturally replenished resources such as the sun, wind, and tides, and is used for various purposes including electricity generation, heating, and transportation. Unlike traditional forms of energy from finite sources such as fossil fuels, green energy is sustainable and includes several types of energy such as bioenergy, geothermal energy, hydrogen, hydropower, marine energy, solar energy, and wind energy.

According to the International Energy Agency (IEA), there has been impressive growth in green energy spending, however, it remains highly concentrated in a few regions, primarily advanced economies, and China. Green energy investments are not evenly distributed due to obstacles such as high upfront costs and macroeconomic challenges affecting broader adoption. While costs for clean technologies have risen in recent years, they remain competitive compared to fossil fuels.

Despite record global investments in energy transition technologies reaching $1.3 trillion in 2022, this amount falls short of the necessary investment to achieve the 11.2 Terawatts of green energy capacity pledged by countries. To address this, there is a need for increased and more investment in green energy, particularly in developing countries, which have received disproportionately low levels of funding despite their high energy needs. The global investment in renewable generation capacity must exceed USD 1.5 trillion annually to meet targets.

Inflation Reduction Act Spurs Investments in Green Energy

Analysts are bullish on the investment opportunities in green energy, particularly in light of the U.S. government’s recent fiscal stimulus efforts, including the Inflation Reduction Act. The Biden administration’s $370 billion investment in energy and climate incentives is expected to significantly boost various sectors within the green energy industry. Experts highlight the importance of tax credits and other incentives aimed at developing renewable energy infrastructure and supply chains, especially in the U.S. and with fair trade partners. While traditional, large-cap-weighted ETFs are popular, there’s growing interest in more diversified, equal-weighted approaches that include smaller, innovative companies in areas like battery production, solar power, and critical mineral extraction. This transition to renewable energy is seen as a global trend, offering investment opportunities beyond North America.

JP Morgan is actively investing in green energy projects by providing tax equity financing to support the development and construction of solar and storage projects in the United States. In May, the bank committed $680 million in tax equity financing to Ørsted, a leading energy developer, for the construction of two major projects: the Eleven Mile Solar Center, a 300 MW solar project in Arizona, and the Sparta Solar, a 250 MW solar project in, Texas.

This investment is one of the largest solar and storage tax equity transactions since the passage of the Inflation Reduction Act (IRA), which introduced new tax credit mechanisms, including the ability to transfer tax credits. The bank’s involvement allows it to optimize its federal tax obligations while supporting the expansion of green energy infrastructure. Additionally, this deal builds on its existing investments in 1.8 GW of Ørsted’s U.S. onshore green energy portfolio, demonstrating the bank’s interest in the energy transition.

The current level of investment in green energy falls short of what is required to transition to a sustainable energy future. A more equitable distribution of investment and a stronger commitment to overcoming barriers such as high upfront costs. With that in context let’s take a look at the 10 best green energy penny stocks to buy now.

Our Methodology

For this article, we scanned green energy ETFs plus online rankings to compile an initial list of 50 green energy stocks. From that list, we narrowed our choices to 10 stocks trading under $5 that were the most popular among hedge funds. The hedge fund sentiment was taken from our database of 912 elite hedge funds as of Q2 of 2024. We also included the market cap of these companies as of September 4. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.

Why do we care about what hedge funds do? 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).

Stem (NYSE:STEM)

Number of Hedge Fund Holders: 16  

Market Capitalization as of September 4: $84.97 Million  

Stem (NYSE:STEM) is a leading player in the green energy sector and specializes in AI-enabled software for energy storage and green energy solutions. The company has positioned itself as a pioneer in managing energy resources with its software, Athena, which optimizes battery storage and green energy operations for businesses and utility companies. Stem (NYSE:STEM) has also expanded its suite of software products, introducing PowerTrack, a performance management tool aimed at streamlining the monitoring of solar and energy storage.

The company’s recurring revenues from its software make Stem (NYSE:STEM) a compelling investment opportunity in the green energy space. The company has consistently grown its Contracted Annual Recurring Revenue (CARR) from $52 million in Q1 2022 to $91 million by Q4 2023. Despite a slight setback in Q1 2024, the company is poised to continue expanding its software and services segment, which offers high-margin and long-term contracts. This shift will reduce revenue volatility, making the business more predictable and less reliant on hardware sales.

Stem’s (NYSE:STEM) flagship software, Athena, is widely regarded as an industry leader in energy storage optimization. Athena uses AI to forecast energy needs, optimize storage usage, and improve overall energy management efficiency for clients. Additionally, the launch of PowerTrack, a tool for monitoring solar and hybrid energy assets, is expected to expand the company’s customer base and generate further high-margin software revenue. These products enhance the company’s competitive edge and positions Stem (NYSE:STEM) to capitalize on the growing demand for advanced energy management solutions.

Stem (NYSE:STEM) has made significant strides towards profitability,  In Q1 2024, the company nearly broke even in operating cash flow and reduced its capital-intensive project backlog by canceling lower-margin contracts worth approximately $257 million. This allows Stem (NYSE:STEM) to focus on more profitable, high-margin opportunities. Management projects positive operating cash flow in 2024 for the first time in its history.

Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $2.31, which represents a 134% upside potential from its current level. As of the second quarter, the stock is held by 16 hedge funds and the stakes amount to $7.81 million. Ardsley Partners is the largest shareholder in the company with stocks worth $1.94 million as of June 30.

Overall STEM ranks 2nd on our list of the best green energy penny stocks to buy. While we acknowledge the potential of STEM 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 STEM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

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