Investors might be feeling a tad cautious about Celestica (TSX: CLS) these days, and it’s not without reason. Despite reporting record-breaking revenues of $2.5 billion in the third quarter of 2024, a 22% increase year over year, the company’s stock has been on a rollercoaster ride. As of writing, CLS is trading at $99.11. This comes after a period of significant volatility, with Celestica stock reaching an intraday high of $102.58 and a low of $95.97 during one day alone.
So, what should investors consider if eyeing up Celestica stock? And is there another stock to buy instead? To me, the answer is a clear “yes.”
What to watch
One factor contributing to investor wariness is Celestica stock’s reliance on hyperscale customer investments in data centre infrastructure. While this has driven a 42% year-over-year increase in their Connectivity and Cloud Solutions (CCS) segment, such dependence can be a double-edged sword. Any slowdown in hyperscale investments could adversely affect Celestica’s revenue streams.
Moreover, the rapid growth in the Hardware Platform Solutions (HPS) segment, with revenues surging by 54% to $761 million, is primarily driven by demand for high-capacity networking switches. While impressive, this growth is heavily tied to current technological trends. This can shift unexpectedly, potentially leaving Celestica stock vulnerable if demand wanes.
On the financial front, Celestica’s adjusted earnings per share (EPS) reached $1.04 in the third quarter (Q3) of 2024, marking the highest in the company’s history. However, the company’s trailing price-to-earnings (P/E) ratio stands at 29.96. Some analysts consider this high, especially when compared to industry peers. This elevated P/E ratio suggests that the stock may be overvalued, leading to concerns about its future performance.
Consider Shopify instead
In contrast, Shopify (TSX: SHOP) has been garnering positive attention from analysts. The company reported a 26% increase in revenue for Q3 2024, totalling $2.16 billion, and a 24% rise in gross merchandise volume (GMV) to $69.72 billion. These robust figures highlight Shopify stock’s strong market position and its ability to attract a growing number of merchants to its platform.
Shopify’s strategic initiatives have also played a significant role in its favourable outlook. The introduction of artificial intelligence (AI)-powered tools, such as the Sidekick assistant, has enhanced the platform’s appeal. This is by providing merchants with valuable insights into sales trends and customer behaviour. Furthermore, Shopify stock’s efforts to improve shipping efficiency and offer discounted rates have made it an even more attractive option for online retailers.
Financially, Shopify’s operating income more than doubled in Q3 2024, reaching $283 million, up from $122 million the previous year. The company’s free cash flow also saw a significant boost, increasing by 53% to $421 million. These impressive financial metrics underscore Shopify stock’s effective scalability and profitability.
Looking ahead, Shopify stock provided an optimistic forecast for the fourth quarter, anticipating revenue growth in the mid- to high-20% range. This positive outlook is bolstered by the company’s strong performance during key shopping periods like Black Friday and Cyber Monday. Sales reached $11.5 billion globally, a 24% increase from the previous year.
Bottom line
While Celestica has demonstrated notable growth, its heavy reliance on specific market segments and a high P/E ratio may give investors pause. Conversely, Shopify stock’s diversified growth strategies, innovative technological integrations, and strong financial performance have made it a darling among analysts, positioning it as a more attractive investment opportunity in the current market landscape.
