Typically, an earnings beat during a rough economic outing generates celebration. However, the opposite sentiment materialized for Canadian Solar (NASDAQ:CSIQ). Specializing in the manufacturing of solar photovoltaic (PV) modules and the running of large-scale solar projects, Canadian Solar beat on profitability expectations for the third quarter but slipped against the revenue target. Unfortunately, CSIQ stock fell, likely on broader pressures on the renewable energy sector’s cost structures.
On paper, circumstances appeared largely positive. For earnings per share, Canadian Solar delivered $1.12, handily beating Wall Street’s consensus target of 58 cents. For context, the company posted EPS of 42 cents in the year-ago period. These stats are adjusted for non-recurring items.
According to Zacks Equity Research, this latest performance represents an earnings surprise of 93.1%. Over the last four quarters, Canadian Solar beat EPS expectations three times.
On the revenue front, the renewable energy specialist generated $1.93 billion. While this tally beat Q3 2021’s haul of $1.23 billion, it missed the consensus target by 5.38%. It also slipped sequentially against Q2 2022’s result of $2.31 billion. Further, those interested in CSIQ stock should note that the underlying company only beat the consensus sales target once in the last four quarters.
Dr. Shawn Qu, chairman and CEO of Canadian Solar, stated the following during the earnings call:
“We achieved a 123% increase in net income on a year-over-year basis, despite the headwinds from ongoing COVID-19 shutdowns and macroeconomic challenges. We continue to execute our long-term strategy and build on our competitive position with a further expansion of our upstream capacity and increased level of vertical integration in our solar manufacturing capacity.”
CSIQ Stock Struggles Against Longer-Term Headwinds
While Wall Street extended grace to certain companies because of pandemic-related pain points, it provided no such relief for CSIQ stock. Though shares initially gapped up to start the Tuesday session, volatility soon followed. At the time of writing, CSIQ fell more than 4% against the prior day’s close.
The main culprit likely centers on cost-structure issues for the solar industry. In late 2021, a report by Solar Energy Industries Association and Wood Mackenzie forecasted that the U.S. solar industry will grow 25% less than initially anticipated during 2022 because of supply-chain constraints and rising raw material costs. These headwinds invariably affect the global solar industry, thus weighing on CSIQ stock in principle.
Furthermore, prior to the pandemic, the solar PV sector specifically saw overall cost declines thanks to economies of scale and public policies. Certainly, geopolitical flashpoints emboldened investments in renewables. Thus, the public policy component if anything improved. However, soaring inflation and supply disruptions throughout this year hurt the former component.
As Canadian Solar revealed, the sequential revenue miss “primarily reflects lower revenue from project sales and battery storage solutions and a small decline in module average selling price.” To be fair, gross margins increased sequentially due partly to the “depreciation of the Renminbi relative to the U.S. Dollar.”
Still, the concern for CSIQ stock is whether the underlying company can rely consistently upon favorable currency dynamics. Should other nations respond with rate hikes of their own, the net impact would likely yield a negative cost profile for the solar industry.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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