What happened

Shares of Canadian Solar (NASDAQ:CSIQ) stock exploded 10.8% higher as of 10:45 a.m. EDT on Thursday, after the Ontario-based solar module maker announced a bit of an earnings miss in Q1 2021 -- but terrific guidance for the second quarter.

Heading into Q1, analysts had forecast Canadian Solar would earn $0.41 per share on $1.05 billion in sales. In fact, the company earned only $0.36, despite achieving $1.09 billion in sales.  

Person in a hard hat holding a solar panel.

Image source: Getty Images.

So what

So Canadian Solar beat on revenue but missed on earnings. Is that good news or bad?

Well, in addition to beating estimates, the sales number was up 32% year over year, which sounds pretty good and is at the top of the company's guidance range. Similarly, gross margins of 17.9% for the quarter were very close to the maximum 18% that management had predicted. Profits, however, were quite a bit lighter than expected, a consequence of operating costs rising 38%, which was faster than sales. Profits were also down more than 80% year over year -- not good.  

And things could get worse on that front.

Now what

Management was pretty optimistic about its future, which probably explains why investors are reacting so positively despite the earnings miss. In new guidance, Canadian Solar predicted that module shipments will range from 3.5 to 3.7 gigawatts in Q2 -- up as much as 19% sequentially from Q1. Gross margins on these shipments, however, will plummet to now more than 10.5%, said the company, far below Q1 levels.

While management left its sales guidance for the rest of 2021 intact -- 18 to 20 gigawatts shipped and revenue ranging from $5.6 billion to $6 billion -- the steep drop in Q2 gross margins does concern me. While investors by and large seem happy with today's results, I'd actually advise caution until we see where profit margins are heading over the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.