By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
Despite impressive Q2 results and guidance, Celestica's (CLS) stock faces significant risks, including inventory channel stuffing, cyclical hyperscale demand, and potential margin compression.
Risk: Inventory channel stuffing and the 'bullwhip effect' causing massive volatility in EMS orders.
Opportunity: Continued strong growth in AI-related revenue driven by hyperscaler demand.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Artificial intelligence (AI) stocks have taken a hammering lately, as investors have been rotating out of this sector due to multiple concerns, such as circular financing, competition from China, and the viability of the enormous sums being spent on AI data center infrastructure.
The Global X Artificial Intelligence & Technology ETF, an exchange-traded fund that invests in companies benefiting from the proliferation of AI by integrating this technology into their operations, along with companies selling AI-related hardware and software, has shed 8% of its value over the past month.
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However, AI hardware specialists continue to clock impressive growth, suggesting that the recent downturn in this sector may not be long-lasting. Celestica (NYSE: CLS) is the latest company to report solid results and raise its annual guidance, following impressive reports from companies such as ASML and Taiwan Semiconductor Manufacturing in July.
This contract electronics manufacturer, which counts Broadcom (NASDAQ: AVGO), Intel, and Advanced Micro Devices as its key customers, has seen its shares slide 12% over the past three months. However, this pullback is an opportunity for savvy investors to buy a top AI stock at a really attractive valuation. Let's look at the reasons why.
Celestica provides electronics manufacturing services (EMS) to various industries, such as data center and networking, aerospace and defense, healthcare, industrial, semiconductor manufacturing, and supply chain management. Its connectivity and cloud solutions (CCS) business has been experiencing outstanding growth lately, driven by robust demand for its networking switches deployed by the leading chip designers mentioned earlier.
This explains why Celestica's revenue increased by an impressive 62% year over year in Q2 to $4.7 billion. Even better, the company's earnings per share rose 83% year over year to $2.54. Celestica's guidance was the icing on the cake, with the company now expecting 2026 revenue to land at $20.5 billion, up from its prior guidance of $19 billion. It has also raised its non-GAAP earnings per share guidance to $11.30 from the earlier estimate of $10.15.
The updated guidance points toward a 65% jump in revenue from last year. Meanwhile, earnings per share are now expected to grow by 87%. More importantly, Celestica management noted in its earnings press release that its revenue growth rate will accelerate next year. Its adjusted earnings per share will continue to grow faster than revenue in 2027.
I won't be surprised to see Celestica's growth accelerating beyond next year, thanks to its partnerships with the likes of Broadcom, Intel, and AMD. Broadcom, for instance, reported a 143% year-over-year increase in its AI semiconductor revenue in the previous quarter to $10.8 billion. The company anticipates a 200% year-over-year increase in AI revenue in the current quarter to $16 billion.
What's more, Broadcom is confident of achieving more than $100 billion in AI revenue next year, indicating a significant improvement in the quarterly revenue growth rate of its AI business. Also, Broadcom has lucrative long-term agreements to deploy custom AI processors for major hyperscalers, which will be a tailwind for Celestica.
So, it is easy to see why analysts have become even more bullish regarding Celestica's bottom-line growth prospects over the next three years.
The recent slide in Celestica's shares explains why it is trading at 36 times earnings, a small premium to the tech-laden Nasdaq-100 index's earnings multiple of 33. The stock should ideally trade at a larger premium, given the impressive earnings growth it is clocking and the sharp earnings jump Celestica could deliver through 2028.
Assuming Celestica's earnings reach $26.96 per share in 2028, and it trades in line with the Nasdaq-100 index's multiple of 33 at that time, its stock price could jump to $890. That's nearly 2.7x its current stock price, suggesting that investors should consider buying this tech stock before it starts soaring.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Broadcom, Celestica, and Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Celestica's AI-exposed growth is real but its projected 2.7x stock upside by 2028 requires multiple expansion that current AI sector rotation and capex uncertainty make far from guaranteed."
Celestica (CLS) delivered a genuine 62% YoY revenue surge to $4.7B and 83% EPS growth in Q2, driven by its EMS role in AI accelerators for AVGO, AMD, and INTC. The raised 2026 guide to $20.5B revenue and $11.30 EPS implies continued 30%+ CAGR, yet the stock trades at only 36x forward earnings versus Nasdaq-100 at 33x. This looks like a re-rating candidate if AI capex from hyperscalers holds. However, the article's 2.7x upside to $890 by 2028 assumes both flawless execution and no multiple compression despite rising macro risks.
The entire thesis rests on sustained hyperscaler AI spend that could be curtailed by ROI doubts, circular financing exposure, and Chinese competition; if Broadcom's $100B AI revenue forecast slips or Celestica's CCS margins peak, the 36x multiple will contract sharply rather than expand.
"Celestica's valuation is currently pricing in perfect execution and perpetual growth, leaving zero margin for error should hyperscaler capital expenditure cycles normalize."
Celestica (CLS) is a classic 'picks and shovels' play on AI infrastructure, but the article’s valuation math is dangerously simplistic. Trading at a forward P/E of ~36x is not a 'no-brainer' for a contract manufacturer (EMS) that historically operates on razor-thin margins. While the 62% revenue growth is impressive, it is highly concentrated in the CCS segment and tied to the cyclicality of hyperscaler capex. If AI infrastructure spending pivots from hardware build-outs to software monetization, CLS will face immediate margin compression. The projected $890 price target assumes a sustained 33x multiple, ignoring that EMS providers typically trade at a significant discount to pure-play semiconductor designers.
The bull case ignores that Celestica is essentially a low-margin manufacturing utility; if AI chip demand plateaus, they have zero pricing power to protect their bottom line compared to the IP-heavy firms they serve.
"Celestica's near-term growth is defensible, but the 2.7x target assumes both continued EPS acceleration AND no valuation reset—a two-tailed bet that ignores semiconductor cycle history."
Celestica's 62% revenue growth and 83% EPS growth are real, but the article conflates contract manufacturing upside with equity upside. The valuation math assumes: (1) $26.96 EPS by 2028—a 138% CAGR from $11.30 guidance, (2) no multiple compression despite cyclicality in semiconductor capex, and (3) zero execution risk across three years. The article also cherry-picks Broadcom's AI revenue trajectory without noting that custom chip manufacturing is consolidating toward fewer partners. Celestica's 36x P/E already prices in substantial growth; the 'small premium to Nasdaq-100' framing obscures that EMS businesses historically trade at discounts during peak cycles.
If Broadcom, AMD, and Intel bring AI chip manufacturing in-house or shift to fewer, larger partners to improve margins, Celestica's growth stalls and multiple compresses simultaneously—a 50% downside is plausible if guidance misses in 2025.
"Celestica’s multi-year growth relies on a fragile AI capex cycle and hyperscaler commitments; any slowdown could trigger meaningful multiple compression."
The article leans into Celestica (CLS) as a clear AI hardware beneficiary, citing Q2 62% YoY revenue growth to $4.7B and guidance for 2026 revenue of $20.5B with strong EPS upside. Yet the bullish case glosses over cyclicality, customer concentration (Broadcom/Intel/AMD), and the fragility of an EMS model that thrives on AI capex bursts. A slowing hyperscale cycle or easing supply constraints could compress margins and slow revenue growth, despite lofty guidance. Valuation at ~36x forward earnings, with 2028 implied earnings around $26.96, leaves little room for missteps. Missing context on free cash flow, leverage, backlog quality, and geopolitical/supply risks could be pivotal catalysts for risk-off moves.
The strongest counterargument is that the AI data-center boom is cyclical and may not persist at 2026-2028 pace; if hyperscaler capex cools or contract wins slip, Celestica’s growth could disappoint and valuation may compress.
"Inventory pull-forwards likely inflate current guidance, setting up sharp multiple compression on any 2025 digestion."
Claude's 138% CAGR critique misses that Celestica's raised 2026 guide already embeds ~30% revenue CAGR through hyperscaler AI ramps at AVGO/AMD. The real unmentioned risk is inventory channel stuffing: EMS firms routinely pull forward revenue, masking true end-demand. If Q3 shows backlog digestion amid any hyperscaler pause, the 36x multiple collapses faster than consensus expects.
"The risk of channel stuffing suggests that current revenue growth may be masking a looming inventory correction rather than reflecting sustained end-user demand."
Grok's concern about channel stuffing is the missing link here. While everyone focuses on hyperscaler capex, we are ignoring the 'bullwhip effect'—where small fluctuations in end-demand cause massive volatility in EMS orders. If Celestica is over-shipping to satisfy Q2 growth, the Q3/Q4 backlog will inevitably show a 'hangover' effect. This isn't just about valuation multiples; it's about whether the revenue growth is organic or a temporary artifact of supply chain replenishment.
"Channel stuffing is a Q3-Q4 timing risk, not a 2026 growth invalidator—backlog trends will determine which."
Grok and Gemini are circling the right concern—channel stuffing—but conflating two distinct risks. Inventory pull-forward affects Q3 comparables, not the 2026 thesis. The real test: does Celestica's backlog-to-revenue ratio stay elevated through 2025? If it normalizes sharply in Q3, that signals demand was pulled forward, not structural. But if backlog remains robust relative to revenue, the bullwhip concern evaporates and the 30% CAGR becomes more defensible. We need backlog data, not just revenue beats.
"Margin risk, not backlog anxiety alone, is the real driver that could compress CLS's multiple even with strong 2026 guidance."
Grok raises a valid channel-stuffing concern, but the bigger flaw is margin risk hidden by backlog. If CCS volume growth slows or price-to-cost improves, Celestica’s profits could regress even as revenue stays high. The 30% CAGR relies on strong operating leverage in a high-margin CCS mix; any backlog normalization or weaker hyperscale demand could trigger margin compression and a multiple reset, undermining the bull case despite the 2026 guide.
Despite impressive Q2 results and guidance, Celestica's (CLS) stock faces significant risks, including inventory channel stuffing, cyclical hyperscale demand, and potential margin compression.
Continued strong growth in AI-related revenue driven by hyperscaler demand.
Inventory channel stuffing and the 'bullwhip effect' causing massive volatility in EMS orders.