Energy Recovery's Strategic Momentum Across Three Core Markets: A Catalyst for 2025–2026 Growth

Energy Recovery, Inc. (NASDAQ: ERII) is emerging as a standout player in the global transition toward sustainable infrastructure, leveraging its expertise in desalination, wastewater treatment, and CO2 refrigeration to position itself at the intersection of critical 2025–2026 inflection points. With a strategic focus on operational and geographic expansion, the company is not only capitalizing on existing demand but also proactively shaping the future of water and energy management. For investors, this dual focus on innovation and execution presents a compelling case for outsized growth in the coming years.

Desalination: A Cornerstone of Global Water Security

The desalination sector remains Energy Recovery's most mature market, accounting for 60% of its revenue. The company's PX® Pressure Exchanger technology, which recovers energy from seawater reverse osmosis (SWRO) systems, has become a de facto standard in the industry. Recent contracts in Spain—worth $7 million—underscore the growing demand for energy-efficient solutions in Europe, where carbon-neutral infrastructure is a priority. These projects, projected to achieve up to 98% energy savings, align with global decarbonization goals and highlight Energy Recovery's ability to scale in high-margin markets.

Moreover, the company's decision to extend the design life of its PX units from 25 to 30 years is a strategic masterstroke. This move not only enhances customer confidence but also creates a recurring revenue stream from maintenance and replacements. With SWRO systems now accounting for over 40% of global desalination capacity, Energy Recovery's dominance in this space is both defensible and scalable.

Wastewater Treatment: Diversifying into a $12 Billion Opportunity

While desalination remains the backbone of Energy Recovery's business, the company is aggressively expanding into the wastewater treatment market—a $12 billion global industry. This diversification is being driven by a newly appointed Chief Technology Officer for the Wastewater division, signaling a strategic pivot to address the growing need for water reuse and industrial effluent management.

The company's modular LPT hydraulic turbochargers are already being deployed in the Middle East and Asia, where water scarcity is intensifying. These solutions reduce the total cost of ownership for customers, enabling rapid deployment and long-term client relationships. Energy Recovery's focus on building reference cases in five key verticals—municipal, chemical, textile, manufacturing, and mining—further strengthens its value proposition. By the end of 2025, the company aims to have two reference cases in each vertical, a milestone that could accelerate adoption and drive revenue diversification.

CO2 Refrigeration: A High-Potential Frontier

Energy Recovery's foray into CO2 refrigeration technology represents its most ambitious growth lever. This segment, still in its early stages, is gaining traction due to the phase-down of hydrofluorocarbons (HFCs) under the Kigali Amendment and the rising demand for energy-efficient cooling solutions. The company's summer testing of next-generation CO2 refrigeration systems, in collaboration with OEMs like Hill Phoenix, is a critical step toward commercialization.

While data centers remain a distant opportunity, the heat pump market is already showing promise. CO2-based systems offer superior efficiency and environmental benefits, positioning Energy Recovery to capture market share as regulations tighten and sustainability becomes a non-negotiable for industries. The company's ability to innovate in this space—coupled with its existing expertise in high-pressure systems—gives it a unique edge over competitors.

Financial Strength and Shareholder-Friendly Policies

Energy Recovery's strategic momentum is underpinned by robust financials. As of June 30, 2025, the company holds $93.7 million in cash, providing flexibility to fund R&D, expand operations, and return capital to shareholders. The recent $30 million share repurchase program builds on a previous $50 million initiative, reflecting management's confidence in the company's intrinsic value. With Q2 2025 adjusted EPS at $0.07—well above estimates—and a forward P/E ratio of 25.7x, the stock appears undervalued relative to its growth trajectory.

Historically, Energy Recovery's stock has demonstrated a strong positive response to earnings beats. From 2022 to the present, the company has achieved a 70% win rate in the 3-day, 10-day, and 30-day periods following earnings releases, with an average return of 8.09% in the most favorable scenarios. This consistent performance underscores the market's recognition of the company's operational execution and growth potential.

Investment Thesis: Positioning for 2025–2026 Inflection Points

The convergence of global water scarcity, decarbonization mandates, and technological innovation is creating a perfect storm for Energy Recovery. By 2026, the company is poised to benefit from:
1. Increased adoption of SWRO systems in emerging markets, driven by Energy Recovery's extended PX unit lifespan.
2. Wastewater treatment expansion, supported by regulatory tailwinds and the company's growing reference cases.
3. CO2 refrigeration commercialization, which could unlock new revenue streams in industrial and commercial cooling.

For investors, the key risks include execution delays in R&D and potential macroeconomic headwinds. However, Energy Recovery's strong cash reserves, recurring revenue model, and leadership in energy-efficient technologies mitigate these concerns.

Conclusion: A High-Conviction Play in Sustainability

Energy Recovery's strategic expansion across desalination, wastewater treatment, and CO2 refrigeration positions it as a leader in the global sustainability transition. With a clear line of sight to 2025–2026 inflection points and a management team focused on both innovation and shareholder value, the company offers a compelling long-term investment opportunity. For those seeking exposure to the water and energy efficiency sectors, Energy Recovery's stock represents a rare combination of defensible margins, scalable growth, and ESG alignment.