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Why Canadian Solar Inc.'s Stock Dropped 26% in a Month

By Travis Hoium - Sep 8, 2015 at 1:23PM

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There are serious warning signs for Canadian Solar.

What: Shares of Canadian Solar (CSIQ -0.85%) have plunged 26% since the start of August, highlighted by a 21% drop following second-quarter earnings.

So what: From the second-quarter earnings release, investors focused on an expected drop in gross margin from 15.2% in Q2 to 12%-14% in Q3. This could lead to a net loss in the quarter, which may be shocking for a company many investors thought was one of the most profitable in solar.

What's really happening is that high-margin projects in Canada are being completed, and by 2016 there likely won't be any windfall profits left. These projects are what has led to industry-leading margins, not lower costs or better execution than competitors.

Now what: I've been saying all year that investors may be in for a rude awakening when Canadian Solar's projects in Canada are completed. That's proving to be the case, and once the final projects are completed in the fourth quarter, the company is back to making commodity solar panels and building projects with similar components as competitors. That's a recipe for low margins over the long term, and I wouldn't be jumping on this solar stock for that reason, no matter the discount the stock appears to have been trading at over the past month.

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