The solar industry is in a better position than it's been in in a long time now that fossil fuel prices are up, U.S. subsidies are increasing, and solar energy can compete with traditional electricity sources around the world on a cost basis. But the fact remains that not all solar stocks will be great investments long-term. 

One that's a little difficult to gauge is Canadian Solar (CSIQ -2.68%), a Chinese manufacturer of solar panels. The company is profitable and seems to be a great value by some metrics, but it may not have the competitive advantage needed to be a great investment. 

Solar power plant at dusk.

Image source: Getty Images.

The headline numbers

The second quarter of 2022 seemed to show great results. Revenue of $2.31 billion was up 62% from a year ago, gross margin was up to 16%, and net income jumped 378% to $89 million, or $1.07 per share. 

Canadian Solar has reached an incredible scale, with solar module capacity of 27.9 gigawatts (GW) at the end of the second quarter and expectations to grow to 50 GW by the end of 2023. 

Shares trade for just 20 times trailing earnings, which looks cheap given the growth rate. But there are some reasons to avoid this stock. 

3 reasons not to buy Canadian Solar stock

There are three big reasons to avoid Canadian Solar stock, and I'll start with debt. The company has over $3 billion in debt, most of it short-term debt with Chinese banks. Debt is a huge risk for a manufacturer, and investors could get a much more financial stable business in First Solar (FSLR -1.64%)

CSIQ Net Financial Debt (Quarterly) Chart

CSIQ Net Financial Debt (Quarterly) data by YCharts

The second reason to avoid Canadian Solar is the fact that the company makes commodity solar panels. Like any commodity, prices and profitability will ebb and flow with supply and demand. The company is ramping up capacity quickly, but there doesn't seem to be much of a moat when its products are similar to those of other manufacturers. A drop in demand would leave Canadian Solar competing mostly on price, which in the past has lead to large losses. We've seen in the past that commodity solar manufacturing is a tough business to run profitably long-term. 

Finally, the company's project development business isn't consistently profitable. Most manufacturers have sold off their development businesses because of how volatile they are, but Canadian Solar has held on. Gross margins in the last five quarters were 4.2%, 43.7%, 3.5%, 19.2%, and 14.4%. That's a wild ride for investors, and even one bad project can sink results for the entire business for a year. With interest rates on their way up, I'm avoiding the solar project development business today. 

A growth trap in solar

Canadian Solar looks like a growth stock, but I think that's a trap for investors. Manufacturing capacity ages extremely quickly in solar, and there's no indication there's much pricing power. That leaves a lot of risk in operations -- and combined with the risk on the balance sheet, this isn't a stock I'm buying today.