Celestica (CLS) (TSE:CLS) stock has dipped significantly from its 52-week high of $63.49, as you can see below. The stock, which has surged on the back of the growth of artificial intelligence (AI), is now trading with a price-to-earnings (P/E) below its five-year average. While I’m conscious that the exponential growth we’ve seen in AI-related stocks has led to pockets of overvaluation, I believe Celestica remains undervalued at the current price. That’s why I’m bullish and think this is an opportunity investors should consider.
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Celestica and the Tech Sell-Off
In recent weeks, we’ve seen more volatility in the stock market, particularly within the technology sector, and the recent downturn has been driven by several key factors.
Firstly, mirroring sentiment in late 2021, investors have grown increasingly wary of the high valuations associated with AI-related stocks. Many stocks have risen due to quite vague associations with AI or simply because their peers were performing rather well.
ASML (ASML) is perhaps a good example of this. The stock had surged 51% from the start of 2024 until July, but the business is actually fighting to recover from chip oversupply in several key sectors.
The Technology sector has also been hit hard by a disappointing start to the earnings season. Several major technology firms have reported earnings that fell short of expectations, further dampening investor sentiment.
Broader economic concerns have also played a role in the sell-off. Recent data has shown a cooling job market and a slowdown in manufacturing activity, raising fears of a potential recession in the U.S.
The Institute for Supply Management reported that manufacturing activity fell to an eight-month low in July, while new unemployment claims reached an 11-month peak. This has contributed to a cautious market environment, prompting investors to pull back from riskier assets like tech stocks.
Celestica stock has been dragged down as well, falling 27% from its highs.
Celestica Is Still Beating Expectations
Despite the broader tech sector experiencing a significant sell-off, Celestica has once again surpassed market expectations with its second-quarter 2024 results. The company reported a 23% increase in revenue year-over-year, reaching $1.94 billion. If it wasn’t for the unique conditions of the AI revolution, we’d probably call this remarkable. Additionally, Celestica achieved a 65% rise in non-IFRS adjusted earnings per share (EPS).
The company’s Connectivity & Cloud Solutions (CSS) business drove the business forward with 51% revenue growth. Celestica saw robust demand for data center servers and storage products, reflecting the ongoing trend of hyperscale data center expansion and enterprise cloud adoption.
Further, the Hardware Platform Solutions (HPS) business — delivering customized solutions for networking, storage, and computing — is seemingly the most exposed to trends within AI. “The growth in our communications end market was driven by accelerating demand for HPS networking products from our hyperscaler customers, primarily in support of their investments in AI/ML infrastructure,” Mandeep Chawla, the company’s CFO, said in the earnings call, adding that the 800G switch programs were in demand.
The booming CCS segment has been instrumental in offsetting challenges in the other areas of the business, particularly the softness in the industrial portion of the Advanced Technology Solutions (ATS) segment. Celestica’s ability to capitalize on the strong demand for cloud infrastructure demonstrates its agility and strategic positioning in high-growth markets.
Celestica’s Valuation Metrics
As always, investment decisions boil down to a company’s valuation. And with the recent sell-off, the company certainly doesn’t look expensive.
In fact, the stock is now trading at 12.7x forward non-GAAP earnings. This forward P/E is actually below the company’s five-year average — admittedly the trailing average, not forward — P/E of 14x.
Using the current forecasts, this price-to-earnings (P/E) ratio falls to 11.5x in 2025, and 8.85x in 2026. This infers an impressive growth rate and a price-to-earnings-to-growth (PEG) ratio of around 0.5x (1.0x or less is generally considered to be undervalued).
What’s more, the broader industry forecasts are very strong. According to Mobility Foresights, the global AI hardware market is predicted to grow at a CAGR of 31.3% from 2024 to 2030.
Given the prevailing supportive trends in the AI segment, I believe this valuation could present investors with a rare opportunity.
Is Celestica Stock a Buy, According to Analysts?
On TipRanks, CLS comes in as a Moderate Buy based on five Buys, two Holds, and no Sell ratings assigned by analysts in the past three months. The average Celestica stock price target is $64.71, implying 39.8% upside potential.
The Bottom Line on Celestica Stock
Celestica provides design, manufacturing, and supply chain solutions for electronics, serving various industries, including communications, aerospace, and healthcare. It might not sound like a company that would surge 120% in 12 months, but its exposure to AI trends and hyperscale solutions makes it a really interesting investment.
Personally, I believe this share price correction offers investors, including myself, an opportunity to build exposure to this fast-growing company, which may be overlooked by AI-focused investors as a whole.
