Canadian Solar: Positioned for the Energy Shift

Canadian Solar is one of the world’s largest solar and renewable energy companies, operating across module manufacturing, energy storage, and utility-scale project development. Through its CSI Solar and Recurrent Energy segments, the company blends cost-efficient production with growing exposure to long-term, recurring revenue. With a global footprint and rising demand for clean energy, Canadian Solar is positioning itself for long-term growth. The question is: Does this solar leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Canadian Solar at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Canadian Solar, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Canadian Solar is one of the world’s largest solar technology and renewable energy companies. Founded in 2001 and headquartered in Ontario, Canada, it operates through two main business segments. The first is CSI Solar, which designs, manufactures, and sells photovoltaic modules and battery energy storage products. It follows a flexible, vertically integrated model that combines internal production of ingots, wafers, cells, and modules with outsourced components, allowing the company to scale efficiently while controlling costs. CSI Solar also offers integrated energy storage solutions through its proprietary SolBank platform for utility-scale projects and EP Cube for residential markets. The second segment is Recurrent Energy, which focuses on the development, construction, and operation of utility-scale solar and battery energy storage projects. It has a diversified global pipeline of solar and storage assets and generates recurring revenue through long-term power purchase agreements, asset sales, and energy services. As of the end of 2024, Canadian Solar had delivered nearly 150 GW of solar modules and over 10 GWh of battery storage systems worldwide. Canadian Solar’s competitive moat lies in its ability to offer one of the best value propositions in the industry. While its panels are slightly less efficient than the highest-end alternatives, they are typically 20–30 percent more affordable, making them attractive to cost-conscious customers without significantly sacrificing performance. This pricing power gives Canadian Solar a cost-based moat in a largely commoditized market. In addition, the nature of the solar industry confers switching costs: once solar panels are installed, backed by long-term warranties and service agreements, buyers are unlikely to switch vendors frequently. This is especially relevant in large-scale projects and long-term commercial contracts. Canadian Solar also benefits from scale, brand recognition, and a vertically integrated business model that spans manufacturing to project development. Its global footprint and long-standing relationships with distributors, developers, and utility partners strengthen its competitive position. However, the moat is not without limitations. The industry remains highly competitive, and efficiency gains by rivals could gradually erode the cost advantage.

Management

Dr. Xiaohua “Shawn” Qu is the founder, Chairman, and CEO of Canadian Solar, a role he has held since the company’s inception in 2001. Under his leadership, Canadian Solar has grown from a small renewable energy startup into one of the world’s largest solar technology companies, delivering nearly 150 GW of solar modules and more than 10 GWh of battery storage solutions globally. Dr. Qu combines technical expertise with a long-term strategic vision, having steered the company through multiple industry cycles, including the 2008 financial crisis and the collapse of European solar subsidies, which proved fatal to many competitors. Before founding Canadian Solar, Dr. Qu worked at Ontario Power Generation on a solar power project, an experience that sparked his belief in the future of clean energy. He holds a BSc in Applied Physics from Tsinghua University in Beijing, an MSc in Physics from the University of Manitoba, and a PhD in Materials Science from the University of Toronto. His academic background in solar materials and semiconductors has played a key role in shaping the company’s vertically integrated manufacturing approach and product innovation. Dr. Qu’s journey as a founder is marked by pragmatism and purpose. When he launched Canadian Solar, he did not anticipate building a multi-billion-dollar enterprise; instead, he simply wanted to work in a field he believed would benefit humanity and support his family. That changed after the company won a breakthrough contract to supply solar battery chargers for Volkswagen’s operations in Mexico, propelling Canadian Solar onto the global stage. Known for his modest and deliberate leadership style, Dr. Qu is described as low-key, thoughtful, and deeply committed to the company’s mission. While he has gradually delegated more of the day-to-day responsibilities to his executive team, he remains closely involved in strategic decisions. His ability to navigate regulatory shifts, technological transitions, and global supply chain complexities underscores his resilience and long-term orientation as a leader. Given his unique blend of scientific knowledge, operational experience, and founder’s mindset, Dr. Qu brings a long-term perspective and steady leadership that are central to Canadian Solar’s ability to adapt and compete in a fast-changing global energy landscape.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. anadian Solar has achieved disappointing numbers below 10% every year since 2015. There are several reasons for the consistently low ROIC. First, Canadian Solar operates in a capital-intensive industry. Manufacturing solar modules requires substantial investments in equipment and infrastructure, and the company’s significant capital expenditures have not delivered proportional returns. Second, profit margins have come under pressure due to falling average selling prices for solar modules, which has weighed on earnings. These factors show that while Canadian Solar has been investing to grow, it hasn’t been getting strong enough returns from those investments, which could hurt the company’s ability to build long-term value for shareholders. In 2024, the company recorded its lowest ROIC in over a decade. This was primarily driven by a 21,28% decline in annual revenue compared to the previous year, again due to lower module prices. At the same time, invested capital increased as the company continued expanding its production capacity and energy storage initiatives. These investments may pay off in the future, but they dragged on returns in the short term. It is safe to say that these numbers are underwhelming. While there’s hope for improvement, it remains unlikely that Canadian Solar will consistently achieve high ROIC given the nature of the sector it operates in.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Canadian Solar has consistently increased its equity year over year over the past decade, primarily through reinvested earnings, equity financing, and retained profits. The company has issued new shares to fund expansion projects and acquisitions, contributing to steady equity growth. Additionally, its strategy of retaining a large portion of earnings - rather than paying them out as dividends - has further strengthened its equity base. This approach has supported Canadian Solar’s capital-intensive business model and long-term growth ambitions. The significant jump in equity in 2023 was largely driven by the IPO of its subsidiary, CSI Solar, on the Shanghai Stock Exchange. The listing raised approximately RMB 6 billion (around USD 840 million), boosting the company’s equity for the year. Canadian Solar continues to hold around 62% of CSI Solar’s shares.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. The numbers are very underwhelming, as Canadian Solar has delivered negative free cash flow in eight out of the past ten years. This is largely due to its capital-intensive business model. The company invests heavily in manufacturing facilities, solar project development, and energy storage systems. These substantial upfront expenditures often exceed the cash generated from operations, resulting in persistent negative free cash flow. Additionally, the solar industry is highly competitive, with falling module prices putting pressure on profit margins and further straining cash flow. Canadian Solar’s free cash flow dropped sharply in 2024 - the lowest level in over a decade. This means the company spent significantly more cash than it brought in during the year. A major reason was heavy investment: it spent $1,1 billion on new factories and the expansion of its energy storage business. On top of that, the company recorded losses on some older assets, writing down $65 million in manufacturing equipment and $54 million in project assets that had lost value. These large expenditures and asset impairments put considerable pressure on cash flow. Overall, Canadian Solar's negative free cash flow reflects the challenges of operating in a capital-heavy industry with unpredictable market conditions. While these investments are intended to support future growth, they often lead to short-term cash deficits. Since free cash flow has been negative in most years - and the company reported a negative free cash flow yield in both 2023 and 2024 - we currently cannot draw any conclusions about whether the shares are trading at an attractive valuation based on this metric. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. Before we run the numbers, it’s worth highlighting that Canadian Solar reported a profit of $0,51 per share, for 2024. However, this number is somewhat misleading because most of that “profit” came from a special accounting method rather than strong business performance. The company used something called HLBV accounting, which added $1,95 per share to the reported profit. HLBV stands for Hypothetical Liquidation at Book Value. It’s an accounting method used in U.S. projects where Canadian Solar partners with outside investors who help fund the solar projects in exchange for tax benefits. HLBV doesn’t reflect real cash or operational profit. Instead, it’s a theoretical calculation that asks: “If we shut everything down today and divided up the value on paper, how much would each partner get?” That number is then recorded as income, even though no actual money changes hands. So, while it may appear that the company made a profit, removing the HLBV adjustment reveals that Canadian Solar actually lost money in 2024. Because of that, it doesn’t make sense to base debt repayment calculations on the 2024 numbers. Instead, using the 2023 figures, the company has around 11,3 years' worth of earnings in debt. This is far above the three-year threshold that I consider manageable and is a concern that needs to be monitored closely.

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Risks

Macroeconomic conditions is a risk for Canadian Solar. As a company operating in a capital-intensive industry with long project cycles, Canadian Solar is especially sensitive to factors such as inflation, interest rates, and broader global economic trends. These forces can affect everything from its cost structure to the demand for its products. Inflationary pressures can increase the cost of raw materials, labor, transportation, and project development. If Canadian Solar is unable to pass these rising costs on to customers through higher prices, its profitability may be squeezed. Additionally, inflation can impact currency exchange rates, which is a key consideration for a company with global operations and supply chains. Volatility in exchange rates can create uncertainty in revenues and costs, especially when transactions span multiple currencies. Higher interest rates pose an even more direct threat. Like many companies in the solar industry, Canadian Solar relies on financing to fund large-scale projects. These projects often involve significant upfront costs, followed by modest cash flows over 20 years or more. As interest rates rise, the cost of borrowing increases, making solar projects more expensive to finance. This can reduce the number of viable projects or delay their development altogether. For Canadian Solar’s customers, higher interest rates may make it harder to obtain favorable financing terms or even secure funding at all, reducing demand for the company's modules, energy storage systems, or turnkey projects. An economic slowdown can further weaken global electricity demand and reduce energy prices, which puts downward pressure on the price of solar power and energy storage systems. That, in turn, could make potential customers more hesitant to invest in new solar installations - especially if competing energy sources like oil or natural gas become cheaper.

Global oversupply of polysilicon is a risk for Canadian Solar because it puts significant pressure on pricing across the entire solar supply chain—directly impacting the company's revenues, margins, and competitiveness. Polysilicon is the foundational raw material used to produce solar wafers, cells, and ultimately solar modules. In recent years, global production capacity for polysilicon has expanded rapidly, particularly in China. This expansion has created a structural oversupply, leading to a sharp drop in polysilicon prices - over 40% in 2024 alone. While lower input costs might seem like a benefit, the reality is more complex and often damaging for manufacturers like Canadian Solar. As the price of polysilicon falls, it triggers a chain reaction throughout the supply chain. Manufacturers are forced to cut prices on wafers, cells, and modules to stay competitive. For Canadian Solar, this meant its average selling price for solar modules dropped from $0,30 per watt in 2022 to $0,16 per watt in 2024 - a near 50% decline in just two years. This puts downward pressure on revenue and profitability, especially if the drop in selling prices outpaces the savings from lower input costs. Moreover, persistent oversupply leads to intense price competition. When every manufacturer is trying to protect or grow market share in an environment of falling prices, the result is often margin compression. Canadian Solar has attempted to manage this by aligning production capacity with demand, but that doesn’t insulate it from broader market dynamics. If oversupply continues - as the company expects it will in 2025 - it may face further price pressure, inventory risk, and the potential loss of market share to lower-cost competitors. While long-term demand for solar products remains strong due to global decarbonization efforts, the current market environment is marked by structural overcapacity. Not all manufacturing capacity is effective or sustainable, but its existence still exerts pressure on pricing.

If governments reduce or eliminate subsidies and economic incentives for solar energy, it poses a meaningful risk for Canadian Solar, as these incentives have historically been a key driver of industry growth. While the cost of solar power has declined in recent years - making the sector less dependent on subsidies - government support still plays a crucial role in accelerating adoption and improving project economics, especially in major markets like the U.S. and Europe. Governments around the world offer a variety of support mechanisms to promote solar adoption. These include tax credits, direct rebates, feed-in tariffs, contracts for difference, renewable portfolio standards, and accelerated depreciation. Such incentives reduce the upfront cost of solar installations, making them more financially attractive to utilities, businesses, and homeowners. Canadian Solar’s sales - whether in modules, turnkey projects, or battery storage - are closely tied to these subsidy-driven investment decisions. In the United States, Canadian Solar and its customers benefit directly from provisions in the Inflation Reduction Act, which enhances tax credits for solar projects and introduces incentives for manufacturing solar components domestically. These measures lower the effective cost of solar energy and storage systems while encouraging local production - an area where Canadian Solar has made strategic investments. If these incentives are scaled back, removed, or allowed to expire, it could dampen demand, slow project development, and reduce the financial returns on solar investments. In Europe, government auctions and revised permitting laws continue to support solar deployment, but these policies are also vulnerable to change. Countries may reduce support in response to shifting political priorities, budget pressures, or changes in national energy strategies. In mature solar markets like Germany or Spain, any rollback of incentives could meaningfully slow growth. Canadian Solar has acknowledged that it operates in markets heavily influenced by government policy. If these policies shift unfavorably - whether through the reduction of tax credits, tightening of eligibility criteria, or new permitting challenges - the company could face lower demand, reduced pricing power, and a more competitive environment.

Reasons to invest

Global trends represent a compelling reason to invest in Canadian Solar, as the company stands to benefit from the accelerating shift toward electrification, digitalization, and decarbonization across multiple sectors. These trends are not only changing how energy is used - they are also transforming where and how it is generated, driving sustained demand for solar power and battery energy storage, both of which are at the heart of Canadian Solar’s business. One of the most powerful tailwinds is the surge in electricity demand driven by data centers, artificial intelligence, electric vehicles, and cryptocurrency mining. For example, the share of U.S. electricity consumed by data centers is expected to triple by 2030. These facilities require uninterrupted, high-density power and are increasingly turning to on-site renewable energy and battery storage to ensure uptime and meet sustainability goals. Canadian Solar is well positioned to supply both the solar modules and storage solutions needed to power this growing digital infrastructure. Electric vehicles represent another major growth driver. According to Princeton University, light-duty EVs alone are expected to consume more than 30 times as much electricity by 2030 compared to today. This surge has a multiplier effect - not only will more power be needed to charge EVs, but the grid itself must evolve to handle the load. Clean, decentralized sources like solar, paired with battery storage, will be essential for balancing supply and demand. Canadian Solar’s vertically integrated operations and global reach make it a key enabler of this transition. Artificial intelligence and high-performance computing add further pressure to global electricity use. Training a single large AI model can consume as much energy as 100 households do in a year. As adoption of AI continues to grow, the energy footprint of the digital economy will only expand. Transmission networks and cloud infrastructure already account for 1,5% of global energy use and produce carbon emissions on par with an entire country like Brazil. Together, these trends point to a simple reality: the world’s energy demand is rising, and clean, flexible, and scalable solutions are urgently needed.

Recurring Energy is an increasingly important reason to invest in Canadian Solar, as it marks a strategic shift from a pure-play project developer to a developer-owner-operator model. This transformation is significant because it allows the company to move beyond one-time project sales and begin generating stable, long-term revenue and cash flows from owning and operating energy assets - such as solar farms and battery energy storage systems. Historically, Canadian Solar developed and sold projects to third parties, capturing immediate revenue but forgoing the long-term value those assets could generate. Through Recurring Energy, the company is now retaining more projects in select markets, effectively becoming an independent power producer. This model creates recurring income from electricity sales and long-term power purchase agreements, offering more predictable, higher-margin cash flows compared to traditional module sales. The financial potential is already becoming visible. While Recurring Energy is still in the early stages of scaling its operating portfolio, the company has reported a gross profit margin of 41% for this segment—more than double its overall gross margin of 17%. Management expects a significant contribution to revenue and earnings from Recurring Energy starting in 2025–2026, as more projects reach commercial operation and begin generating cash flow. Canadian Solar’s execution has also been strong. By the end of 2024, the company had fully funded 20 projects and partially funded another 15 set to begin construction. These assets are spread across the U.S., Europe, Brazil, Japan, Taiwan, and other global markets, giving Recurring Energy a geographically diversified platform. BlackRock’s $500 million investment in Recurring Energy - representing a 20% stake - validates the strength and future potential of this segment. The capital infusion supports Canadian Solar’s transition into an independent power producer while signaling confidence from one of the world’s largest institutional investors. It enables the company to retain and operate more projects, rather than selling them early to recycle capital.

Energy storage is a compelling reason to invest in Canadian Solar, as it represents both a high-growth market and a high-margin segment within the company’s business. Through its e-STORAGE division, Canadian Solar is expanding beyond traditional solar module sales to become a vertically integrated provider of comprehensive energy solutions. This positions the company at the forefront of one of the most important trends in global energy: the need to store and dispatch clean power reliably and flexibly. Solar generation is inherently intermittent - it only produces energy when the sun is shining. Battery storage addresses this limitation by enabling energy to be stored during peak production hours and used when needed, such as during the evening or periods of high demand. Management has emphasized that energy storage is critical for ensuring the dispatchability, stability, and security of solar power. As more electric grids integrate renewables, battery systems become essential to maintaining reliability. The market opportunity is substantial. The global battery storage market is projected to surpass 1 terawatt-hour of cumulative capacity by 2030, and Canadian Solar believes it is well-positioned to capture a meaningful share of that growth. Through its proprietary SolBank platform, the company offers advanced, utility-scale storage systems with strong performance, safety features, and customizable configurations tailored to local market needs. This technological leadership is already paying off. Management has consistently noted that every e-STORAGE project to date has contributed positively to profitability. Gross margins for the storage segment currently stand at around 20% - well above the company’s overall gross margin of 17% - and are expected to remain at that level or improve as volumes increase. Crucially, Canadian Solar's ability to bundle solar and storage into integrated, turnkey solutions gives it a competitive edge. As a Tier 1 provider of both technologies, the company can deliver complete systems that are increasingly sought after by customers looking for dependable, 24/7 clean energy. This bundled approach not only supports stronger margins but also deepens customer relationships across the value chain.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,87, which is from the year 2023. I have selected a projected future EPS growth rate of 9%. Finbox expects EPS to grow by 9,2% in the next five years. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Canadian Solar's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $40,76 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Canadian Solar at a price of $20,38 (or lower, obviously) if we use the Margin of Safety price. "Keep in mind that the calculations are based on the 2023 numbers. If we had used the 2024 EPS, which includes the $1,95 per share added from HLBV accounting, the Margin of Safety price would have been $2,69. This is important to remember for context.

The second calculation is known as the Ten Cap price. This represents the return on investment a company owner (or stockholder) would receive based on the purchase price of the business. The goal is a minimum annual return of 10%. Since operating cash flow was negative in 2024, we cannot run the calculation for that year. However, based on the 2023 numbers, the Ten Cap price would have been $4,84.

The final calculation is known as the Payback Time price. It is based on free cash flow per share. However, since Canadian Solar reported negative free cash flow in both 2023 and 2024, I am unable to make this calculation.

Conclusion

I believe that Canadian Solar is an intriguing company with strong management. The company has built a moat through its ability to offer one of the best value propositions in the industry. While it has historically delivered a low ROIC, and this is likely to remain the case due to the capital-intensive nature of the business, ROIC should improve compared to the level seen in 2024. Canadian Solar has reported negative free cash flow in eight of the past ten years, and there is little indication that this will turn positive in 2025. However, as the higher-margin energy storage and Recurring Energy segments continue to grow, we may see more consistent free cash flow generation in the future. Macroeconomic conditions remain a risk, as inflation, rising interest rates, and economic slowdowns can increase costs, reduce demand, and make it harder to finance large-scale solar projects. Additionally, global oversupply of polysilicon continues to put pressure on pricing across the solar supply chain, compressing margins. Another key risk is policy dependence - if governments reduce or eliminate subsidies and incentives for solar energy, it could significantly weaken demand, particularly in key markets like the U.S. and Europe. On the other hand, global trends are a strong reason to be optimistic. Rising electricity demand from data centers, AI, electric vehicles, and broader electrification is driving long-term need for clean, reliable energy. Canadian Solar is well positioned to benefit from this shift. Recurring Energy strengthens the company’s business model by shifting it toward stable, long-term revenue through asset ownership. Energy storage also adds meaningful upside, offering higher margins and the ability to deliver integrated solar-plus-storage solutions. While there are many things to like about Canadian Solar, I believe the risks currently outweigh the potential rewards. For now, I will not be investing in the company.

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