Overcapacity And Trade Barriers Will Erode Solar Margins

Key Takeaways

• Ongoing price declines, global competition, and reliance on China-centric manufacturing threaten revenue stability, margin strength, and earnings predictability.
  
• Rising trade barriers, high capital needs, and rapid tech shifts increase financial risk, cash flow strain, and long-term competitiveness concerns.
  
• Technological leadership, expanding storage, global diversification, and refocused market strategy position Canadian Solar to benefit from strong long-term demand despite near-term industry challenges.

Catalysts

Provides solar energy and battery energy storage products and solutions in Asia, the Americas, Europe, and internationally.

• Persistent structural overcapacity and intense global competition in the solar supply chain are driving sustained module price deflation, which is likely to suppress Canadian Solar's long-term revenue growth and put continued downward pressure on gross margins.
  
• Geopolitical tensions and rapidly evolving trade barriers, including tariffs and shifting U.S. policy regarding foreign entity ownership and manufacturing incentives, are increasing production costs, causing project pipeline delays, and introducing ongoing earnings volatility and margin compression risks.
  
• Continued dependence on China-centric manufacturing for modules and storage solutions exposes Canadian Solar to regulatory uncertainty, foreign exchange losses, and diminished predictability of net earnings, as ongoing trade disruptions create top-line and bottom-line instability.
  
• High capital requirements for new manufacturing facilities—especially in the U.S.—combined with a weaker operating cash flow due to elevated inventories and project assets, are driving up leverage on the balance sheet and could strain free cash flow, worsening future earnings quality and increasing financial risk.
  
• The industry’s rapid technological disruption, including moves toward higher-efficiency cell technologies and alternative chemistries, may outpace Canadian Solar’s R&D investment and operational capacity, potentially resulting in product obsolescence, lower average selling prices, and declining long-term market share, weighing on both revenue and margins.

Canadian Solar Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Canadian Solar compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Canadian Solar's revenue will grow by 9.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.2% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach $67.3 million (and earnings per share of $0.8) by about August 2028, up from $-10.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from -81.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.5%, as per the Simply Wall St company report.

Canadian Solar Future Earnings Per Share Growth

Risks

• Strong global secular demand drivers remain in place, with management emphasizing that electricity demand is growing fast worldwide, fueled by trends like AI, data centers, and the shift to electrification, supporting potential long-term revenue growth for Canadian Solar.
  
• The company is capitalizing on technological leadership in both solar modules and energy storage, highlighted by new N-type TOPCon modules with high conversion efficiency and award-winning storage products, which can boost average selling prices and help defend or expand gross margins over time.
  
• Canadian Solar’s storage segment is experiencing robust growth with a record pipeline of 91 gigawatt hours and $3.2 billion in contracted backlog, indicating structural global demand for storage and providing visibility into potential future earnings.
  
• Diversification through global manufacturing and project development, including investments in U.S. facilities and flexible sourcing strategies, could help the company mitigate policy and geopolitical risks, thereby stabilizing margins and revenue across cycles.
  
• Despite near-term headwinds from overcapacity and policy uncertainty, management is proactively reducing exposure to less profitable markets, focusing on high-margin opportunities, and maintaining a healthy balance sheet with significant project assets, which positions Canadian Solar to benefit from long-term secular growth and ultimately improve net earnings.

Valuation

• The assumed bearish price target for Canadian Solar is $7.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Canadian Solar's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $67.3 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 11.5%.
• Given the current share price of $12.55, the bearish analyst price target of $7.0 is 79.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.