Gamble of the week: a harvester of renewable energy

Three of the biggest investment themes of this decade will be cloud computing, smart power and renewable energy. All are already substantial sectors in their own right, yet the future potential is enormous. By 2020 a quarter of the world's energy could be generated from clean and sustainable power sources, such as solar and wind. This electricity would be fed into the national grid using smart technology, powering data centres offering cheap pay-as-you-go cloud computing applications to consumers and corporations. This would allow widescale connection to the web, 100% of the time.

This is where Power-One steps in. It makes clever electricity devices (known as inverters) for the renewable energy, server farm, power and IT industries. These products have a range of applications. For example, they allow cloud providers to take electricity from the mains and adapt it for their data-centre needs (17% of sales), along with cutting energy consumption and creating less heat.

All told these telecoms, infrastructure and IT operations account for 38% of revenues, with the remaining 62% coming from renewables. Here Power-One is a leading player. Its inverters harvest solar or wind energy and convert the electricity to the right frequency so that it can be pumped into the grid.

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Power-One (Nasdaq: PWER)

The problem, though as with most cutting-edge trends is that progress is not always straight up and to the right. The company, like many of its peers, has recently suffered an air-pocket in demand after German and Italian cutbacks in renewables' subsidies, known as feed-in-tariffs'. The good news is that this should only be temporary. Both of these countries, along with Switzerland and probably others, such as Japan, have decided to turn their backs on nuclear power following the Fukushima explosion.

So how much is the group worth? Wall Street is forecasting 2011 turnover and underlying earnings per share of $1.1bn and 98 cents respectively. I rate the stock on 1.2 times turnover. Adjusting for the $243m cash pile, $216m in convertible bonds, $46m legacy liabilities and $104m of preference shares, this gives an intrinsic worth of more than $10 a share.

As always, there are a few potential banana skins. For one, Power-One is a relatively small entity rubbing shoulders in a vast industry with aggressive rivals such as China. There are also the usual headaches associated with fluctuations in subsidies and foreign exchange, together with handling political interference from governments in the renewables sector. That said, with its first-rate technology and excellent prospects, the stock looks like a good prospect for the adventurous investor. Second-quarter earnings are due out on 28 July.

Rating: SPECULATIVE BUY at $7.50 (market cap $775m)