Celestica (TSX: CLS) has been one of the top performers on the TSX, largely thanks to growing demand for data centre infrastructure and advanced technology solutions. The company has benefited significantly from the rapid growth of Artificial Intelligence (AI) and the strong investment in computing power needed to support it.
But after doubling over the past year, Celestica stock has recently pulled back by nearly 33% from its previous high. Even after that decline, it is still up by about 605% over the past couple of years.
AI is driving Celestica’s growth
Celestica delivered a strong second quarter, with revenue increasing 62% year over year. The company benefited from robust customer demand across both its Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS) businesses. Adjusted earnings per share rose 83% from the previous year.
The CCS segment’s revenue jumped 84% year over year. Strong momentum across both the communications and enterprise markets supported the growth. CCS, which is benefitting from AI-led demand, contributed approximately 81% of Celestica’s total revenue during the quarter.
Within the communications market, revenue increased 62%. The improvement was primarily attributable to increased demand for Celestica’s 800G networking switch programs, while its existing 400G programs also continued to perform strongly.
The enterprise business delivered even stronger growth, with revenue climbing 167% year over year. This performance was largely driven by the faster-than-anticipated production ramp of an AI and machine-learning (AI/ML) computing program for a hyperscale customer. Higher-than-expected demand for storage solutions also boosted the segment.
Celestica’s ATS segment’s revenue increased 8%. Revenue gains across each business supported the segment’s performance. ATS represented approximately 19% of Celestica’s total company revenue in the second quarter.
Overall, the results highlight the increasing importance of AI infrastructure, hyperscale computing, networking, and data-storage demand to Celestica’s growth trajectory, particularly within its CCS business.
Celestica’s outlook is strong
Celestica’s outlook remains solid. Within the CCS segment, revenue from the communications market is projected to increase by approximately 60%. This growth is expected to be driven by increasing demand from hyperscalers for 800G solutions, along with the start of high-volume production for the company’s initial 1.6-terabit programs.
Revenue in the enterprise market is anticipated to rise by approximately 190%, largely reflecting the ongoing expansion of hyperscaler-driven AI/ML infrastructure. The improvement in storage demand is also expected to contribute to this growth.
For the ATS segment, revenue is forecast to grow in the mid-teens percentage range. Robust demand in the capital equipment business, along with the introduction and ramp-up of new programs across the segment’s other business areas, is expected to support the increase.
So, has the opportunity already passed?
Celestica’s recent selloff reflects growing concerns about valuation and potential share dilution. Investors should also consider the risk of slower AI spending. The company has benefited significantly from the surge in AI investment. However, leading AI executives have called for a slowdown in AI development amid concerns about safety and the technology’s broader impact. If AI spending slows, suppliers like Celestica could see growth momentum weaken.
However, Celestica is more than a pure-play AI company. Its diversified business serves customers across multiple areas of the technology industry, providing greater resilience than companies dependent on a single AI product or trend.
Meanwhile, demand for data centre infrastructure and advanced computing solutions should remain strong as businesses continue upgrading their technology capabilities. This supports sustained growth.
Overall, the pullback has made Celestica’s investment case more attractive. AI-driven demand, strong hyperscaler spending, and expanding opportunities in networking and data centre infrastructure provide significant long-term growth potential.
While dilution and a potential slowdown in AI spending remain risks, Celestica’s diversified business offers some protection.
For long-term investors, the opportunity has not passed. Celestica remains a buy for those willing to tolerate near-term volatility.
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