Up 365% over the past 12 months, Celestica (NYSE:CLS) (TSE:CLS) now boasts a market cap of $7 billion. The lesser-known AI winner is a prime example of how strategic shifts toward high-growth sectors can yield huge returns. The Canadian company, which acts as a behind-the-scenes partner for other electronics and technology businesses, has experienced huge tailwinds from the artificial intelligence (AI) sector.
Despite the stock’s meteoric rise, it continues to trade at attractive valuation multiples. Combined with a healthy balance sheet and strong position serving the growing AI and machine learning (ML) segment, I’m bullish on Celestica.
What Is Celestica?
Celestica is a Canadian company that designs and manufactures electronics while providing supply chain solutions for various industries, including aerospace, defense, industrials, healthcare, and enterprise communications. The company’s end-to-end product lifecycle solutions have made it an invaluable partner for more than 100 original equipment manufacturers (OEMs), including Dell (NYSE:DELL) and Cisco Systems (NASDAQ:CSCO).
Celestica specializes in delivering complex and high-precision electronics and services, leveraging AI and robotics to enhance its manufacturing processes. The company also offers additional services, including product testing and logistics solutions.
Given the booming AI sector, Celestica’s Connectivity and Cloud Solutions (CCS) segment has been the main growth driver, and it looks likely to remain that way. The company’s Q1 results highlighted the growth of CCS, representing 65% of revenue — versus 57% a year ago. The remaining 35% came from the Advanced Technology Solutions (ATS) segment — which includes aerospace, defense, and healthtech operations.
The CCS segment supports telecom infrastructure, cloud services, and data centers with products like routers, switches, servers, and storage systems. During the Q1 earnings call, management highlighted that it expects the CCS division and its hyperscaler business to remain the main driver of earnings. “We continue to believe that this secular scene is durable in its nature and is likely to support continued demand strength for our CCS offerings into 2025,” President and CEO Rob Mionis said in the earnings call.
Celestica’s Hyperscaler Customers
For Celestica, hyperscale refers to its operations in providing large-scale infrastructure solutions for massive data processing and storage. Essential for data centers and cloud environments, Celestica’s hyperscaler offerings include scalable servers, storage systems, and networking equipment.
The company’s hardware platform solutions (HPS) deliver next-generation, cloud-optimized data storage solutions, huge computational power, and networking solutions that are enabling the AI revolution.
Celestica’s hyperscaler partners remain central to the company’s growth. According to the company, hyperscaler revenue represented 62% of CCS revenue in Q1, and management expects this figure to continue growing throughout 2024. The Canadian firm is also making investments to ensure it can meet demand from hyperscalers. The company said it is on track to complete the second phase of its Thailand facility expansion by the first half of 2025. Once complete, the facility will help respond to hyperscaler demand.
Celestica’s Value Proposition
Considering the valuations of AI-related companies, I believe Celestica still looks very cheap despite its impressive returns over the past 12 months. The stock is currently trading at 17.8x non-GAAP forward earnings, and this figure is expected to fall to 16.3x in 2025 and 13.3x in 2026. Moreover, this forward price-to-earnings ratio for 2024 still represents a discount versus the information technology sector.
Assuming an earnings per share growth rate of ~15% for the medium term, Celestica is trading with a price-to-earnings-to-growth ratio of around 1.15x. That’s certainly not expensive, given the sector average of about 2.0x, and it may not adequately reflect the long-term tailwind that is AI.
Moreover, Celestica has a healthy balance sheet. Its Q1 earnings report showed cash and cash equivalents of $308 million and a net debt position of $324 million. This net debt position isn’t alarming, especially given the company’s recent investments in production capacity.
Is Celestica Stock a Buy, According to Analysts?
On TipRanks, CLS comes in as a Moderate Buy based on four Buys, two Holds, and zero Sell ratings assigned by analysts in the past three months. The average Celestica stock price target is $51.48, implying 13.1% downside potential.
The Bottom Line on Celestica Stock
As with several stocks in this fast-moving segment — notably those enabling AI in one form or another — analysts’ forecasts have not kept up with the meteoric rise of the share prices. This appears to be one of those occasions, with the target price currently representing a 13.1% discount to the share price at the moment.
However, I remain bullish on Celestica due to its strong balance sheet, impressive tailwinds from its hyperscaler customers, and its capacity to leverage AI to improve its own business processes. At 17.8x forward earnings, I think the stock has plenty of room to grow.
