The third quarter from June to August has not been a good one for Celestica (TSX: CLS). Its stock price fell a little over 37%. But I am not worried about it at all. The dip is a correction following the closing of the equity offering of $3 billion. The company has raised equity capital to fund working capital needs and expand its design and manufacturing capacity.
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Why I am not worried about this stock’s 37% drop
This year, Celestica is manufacturing its first 1.6 Terabit programs for hyperscaler customers. From here on and for the rest of 2027, it has multiple design programs for several named and unnamed hyperscalers. The ones that have been made public are OpenAI, Advanced Micro Devices, and Google.
Concerns around equity dilution will be outweighed once the revenue from hyperscalers flows in. The components Celestica is designing and manufacturing for them are high-margin products with an original design manufacturing (ODM) premium. These components have technical challenges. If Celestica succeeds in manufacturing them successfully, it could attract orders from other hyperscalers. The earnings per share (EPS) growth may far outweigh the EPS dilution from the equity offering.
What is keeping investors wary?
Other than equity dilution, investors are reluctant to buy Celestica stock at its current price of $426 because of supply chain risks. The shortage in memory chips has slowed order execution. However, the management has clarified that it has secured sufficient supply to meet the existing order book. Moreover, the escalating tariff war has made investors cautious.
Based on current ongoing programs, Celestica expects 2027 revenue growth to surpass 65% in 2026. A 2.3 times price-to-sales ratio looks like a bargain for revenue growth above 65%.
The low valuation comes as Celestica has not yet successfully delivered the 1.6T switches. The product not only has to run successfully, but its performance should turn the eyes of its users. ODMs market their products by enhancing their clients’ computing performance. Another risk is revenue concentration, with more than 60% of revenue coming from three customers. It could face “pricing pressure” from hyperscalers, making it compromise on margins for volumes.
While these short-term headwinds will keep the stock volatile, its long-term growth prospects make it a buy-and-hold.
What long-term investors should know about Celestica?
Celestica is an ODM that designs components and secures patents. Hyperscalers use its designs and components and rebrand them. Celestica’s journey from third-party manufacturer to ODM was fueled by the growing need for networking equipment. I would say growing trade protectionism has led to the emergence of ODMs in North America, as top ODMs are concentrated in Taiwan and China, from Foxconn to Pegatron.
Investing purely based on success stories can create a false expectation of returns. ODMs are about securing patents, and that is not easy. The component has to deliver enhanced performance compared to the standard available in the market. The risk of failure is high.
Take, for instance, Google’s tensor processing unit (TPU). Google uses Nvidia’s graphics processing units (GPUs) for its AI infrastructure. However, it is also building its custom TPU for certain AI workloads. This TPU needs a specific configuration of rack space, Ethernet switches, and other components, and Celestica provides that.
ODMs like Foxconn and Pegatron became world-famous names after being associated with Apple. Celestica is still in its growth stage and gaining popularity by building custom racks for OpenAI’s Jalapeño accelerator. It is going beyond just Ethernet switches and rack space to design and build other components.
Technological developments can make Celestica a long-term wealth builder for patient investors. However, you should be mindful that not all ODM designs will be a success. Therefore, investors should view Celestica as a long-term, cyclical growth play.
