The Canadian stock market isn’t known for being a hotbed for AI innovation, at least when compared to the U.S. That said, underneath the surface, there are some pretty strong firms that are doing their part to help fuel the great AI boom, which some like to refer to as the fourth industrial revolution. In many ways, this AI data centre buildout seems like a CapEx trap that might increase the risk profile of the firms that are going a bit overboard with their AI budgets.
Of course, buying up chips, server racks, cooling infrastructure, land, and everything that goes into building a data centre to the scale of one gigawatt or maybe a bit less does not come cheap. And with the magnitude of energy that they stand to draw down from the grid, questions linger as to whether these ambitious, sizeable data centres will actually have enough power to turn things on.
Indeed, it’s an unideal situation to have everything set up, only to have not enough energy to turn most of the infrastructure on. As AI compute becomes more constrained by parts that go above and beyond GPUs (graphics processing units), photonic connectivity, or DRAM (dynamic random access memory), I do think investors should consider diversifying across those “picks and shovels” kinds of plays that have done so well in recent years as firms continue to invest heavily in an effort that may very well transform economies (not just the U.S.) as we know it.
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Celestica stock
On the TSX Index, Celestica (TSX: CLS) is emerging as a Canadian gem that’s starting to get the attention of AI investors on both sides of the border. The company has been reporting some truly remarkable growth figures of late, with the latest (second) quarterly earnings result showing shockingly good 62% year-over-year revenue growth. That’s huge. What’s more, though, is that this ridiculous growth is coming alongside some remarkable operating margin gains.
Of course, we’ve seen a lot of firms in AI post staggering sales growth numbers alongside ridiculously high gross and operating margins. And while all of this paints a picture that sees rising earnings growth, there are still many that are a bit skeptical about how long the high-margin growth is going to last, especially when you consider the historical cyclicality to be had within hardware, semiconductors, and all sorts. It’s hard to predict how the boom days for names like Celestica will end.
Probably not well, but in my view, there’s really no sense in timing the peak, especially if you’re a bear who’s looking to put in some kind of short position. Given the short squeezes we’ve seen across the markets, I think it’s becoming harder to be a bear than a bull. For young, growthy investors, I do think that a small position in a name like Celestica can add some hyper-growth spice to a portfolio aiming to outdo the TSX Index over the long haul.
The bottom line
The secret might be out on Celestica, but I do think that the momentum in connectivity and cloud solutions might have staying power as hyperscalers keep on spending increasing amounts on their AI data centre buildouts. In my view, once energy bottlenecks are addressed, there might be no holding back the infrastructure plays, including Celestica. For investors looking for an alpha jolt who are willing to accept the heightened volatility, I have no issue with nibbling on a bit of CLS right here.
