Rising Tariffs And Vanishing Subsidies Will Hurt Solar Margins

Key Takeaways

• Reduced subsidies, increased tariffs, and new compliance rules threaten revenue growth and erode price competitiveness in major solar markets.
  
• Supply chain cost pressures, overcapacity, and ESG compliance risks are set to compress margins and increase operational challenges.
  
• Diversified project pipeline, technological innovation, regulatory agility, and ESG leadership position Canadian Solar for sustained revenue and earnings growth despite market and policy uncertainties.

Catalysts

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

• The phasing out of investment tax credits for solar in the United States by the end of 2027, combined with stricter domestic content and Foreign Entity of Concern (FEOC) requirements and increasing global tariffs, is projected to significantly raise compliance costs while reducing price competitiveness, which could materially reduce revenue growth in key markets into the next decade.
  
• Sustained reductions in government subsidies and weakening demand in major solar markets such as China, as well as new protectionist policies, are likely to further depress realized selling prices and compress revenues, especially as the addressable market growth moderates.
  
• Persistent increases in supply chain costs, driven by both tariff impacts and higher input prices (notably for polysilicon and wafers), are unlikely to be fully offset by price increases in modules, leading to ongoing pressure on module profitability and a sharp contraction in gross and net margins.
  
• The rapid expansion in global production capacity, ongoing overcapacity in the solar manufacturing sector, and the shift toward contract manufacturing businesses may cause intense price competition and technological commoditization, eroding product differentiation, lowering pricing power, and further damaging margins and earnings visibility.
  
• Heightened scrutiny and compliance requirements related to environmental, social, and governance (ESG) metrics in the solar supply chain, especially concerning raw material sourcing and forced labor allegations, are poised to increase operational costs and risk potential sanctions or restricted market access, undermining both revenue and net income growth over the long term.

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 9.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.1% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach $71.8 million (and earnings per share of $1.39) by about August 2028, up from $-6.9 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 9.1x on those 2028 earnings, up from -110.6x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.7x.
• Analysts expect the number of shares outstanding to grow by 0.35% 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

• The company continues to benefit from robust long-term global demand for solar and energy storage, with its pipeline expanding to 27 gigawatts of solar and 80 gigawatt hours of storage; this strong and diversified project pipeline is likely to support higher recurring revenues and earnings growth into future years.
  
• Canadian Solar's ongoing expansion of battery storage manufacturing and innovation in advanced PV technology, such as fire-tested SolBank 3.0 systems and award-winning EP Cube residential storage, positions the company for margin resilience through product differentiation and technological leadership, which can help sustain gross margins.
  
• The decision to localize and expand U.S. and non-China manufacturing, combined with proactive compliance with evolving U.S. policy (OBBBA and FEOC requirements), enhances access to lucrative U.S. incentives and tax credits, potentially bolstering revenues and net margins even amid regulatory changes.
  
• Demonstrated ability to navigate shifting policy and tariff landscapes, as evidenced by extensive safe harboring strategies and flexible project execution, improves Canadian Solar's risk management and visibility, supporting earnings stability despite macro uncertainty.
  
• Growing ESG leadership, including supply chain audits and substantial reductions in emissions and waste intensities, caters to investor and customer priorities, and may help safeguard or grow Canadian Solar's market share, positively impacting revenues and supporting long-term profitability.

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 $21.0, 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 $7.7 billion, earnings will come to $71.8 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of $11.39, the bearish analyst price target of $7.0 is 62.7% 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.