Celestica (TSX: CLS) provides data centre infrastructure and advanced technology solutions, positioning it to capitalize on the rapid growth of artificial intelligence (AI). Strong financial performance and increasing demand for AI-related infrastructure have supported significant gains in its share price over the past two years. However, the stock has been highly volatile this year, climbing to a high of $655.50 in June before retreating.
Recent weakness across the technology sector has weighed on investor sentiment, as concerns over elevated valuations, substantial capital spending requirements, uncertain returns on AI investments, and rising bond yields have prompted a pullback. As a result, Celestica now trades more than 23% below its June peak, although its shares remain up 30.5% year to date.
With the stock experiencing heightened volatility, investors may be wondering whether the recent pullback presents an attractive buying opportunity. Let’s examine Celestica’s financial performance, growth prospects, and valuation to assess its investment potential.
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Celestica’s financial performance
In July, Celestica reported an impressive second-quarter performance, with revenue surging 62.4% year over year to $4.7 billion. The growth was driven by strong momentum across both its Connectivity & Cloud Solutions (CCS) and Advanced Technology Solutions (ATS) segments, which recorded revenue increases of 84% and 8%, respectively. Within CCS, Hardware Platform Solutions delivered particularly strong results, generating $1.9 billion in revenue, up 58% from the year-ago quarter.
Despite an 18.6% increase in selling, general, and administrative (SG&A) expenses to $104.1 million, the company improved its operating efficiency as revenue growth outpaced expense growth. SG&A expenses declined from 3% to 2.2% of revenue, reflecting stronger operating leverage. Consequently, Celestica’s adjusted operating margin expanded from 7.4% in the prior-year quarter to 8.2%. Supported by robust revenue growth and improving profitability, the company reported net income of $368.8 million, or $3.17 per share, while adjusted earnings per share (EPS) climbed 82.7% year over year to $2.54.
Celestica also demonstrated strong cash-generating capabilities, generating $410.9 million in cash during the quarter and ending the period with $535.7 million in cash and cash equivalents. With accelerating revenue growth, expanding margins, and solid cash generation, the company appears well positioned to capitalize on rising demand for AI and cloud infrastructure. Let’s now examine its growth prospects.
Celestica’s growth prospects
The accelerating adoption of AI across businesses, government institutions, and consumer markets is prompting hyperscalers to expand their AI-ready data centre infrastructure to meet surging demand. Against this backdrop, Celestica is developing innovative solutions, scaling its manufacturing capabilities, and expanding its customer base to strengthen its competitive position and capitalize on emerging opportunities.
Following its strong second-quarter performance, Celestica’s management raised its full-year guidance, projecting revenue and adjusted earnings per share (EPS) growth of 65% and 87%, respectively. The company also expects to generate $600 million in free cash flow this year, underscoring its ability to translate strong demand into cash. Looking ahead, management anticipates further growth acceleration next year, supported by sustained customer demand and an expanding pipeline of new program wins.
Given its strong execution, raised guidance, and favourable industry tailwinds, Celestica appears well positioned to capitalize on the expanding AI and cloud infrastructure markets, supporting a healthy growth outlook.
Investors’ takeaway
Following the recent pullback, Celestica’s valuation has become more appealing. The stock currently trades at 1.6 times forward 12-month sales and 25.9 times forward earnings, which appear reasonable given the company’s strong growth trajectory and favorable long-term prospects.
That said, AI-related stocks could remain volatile in the near term as investors scrutinize the returns on substantial AI investments, rising corporate debt to finance infrastructure expansion, and higher bond yields. Nevertheless, Celestica’s strong financial performance, expanding margins, and solid cash generation provide a strong underlying foundation. Given the company’s growth potential and the sector’s risks, I believe the stock could offer an attractive long-term opportunity for investors with a higher risk tolerance and an extended investment horizon.
