CLS Outpaces Industry in the Past 3 Months: Reason to Buy the Stock?

Celestica Inc. CLS has gained 24.3% over the past three months compared with the industry’s growth of 15.4%. It has also outperformed peers like Flex Ltd. FLEX and Jabil Inc. JBL. Flex has gained 17.3% and Jabil is up 14.7% over this period.  

With more than two decades of experience in manufacturing backed by a simplified and global network, Celestica is committed to delivering next-generation, cloud-optimized data storage and industry-leading networking AI (artificial intelligence) solutions to help customers balance performance, power efficiency and space as technologies evolve. Operating primarily as a behind-the-scenes partner for other electronics businesses, it is among the lesser-known winners of the AI revolution. The Toronto, Canada-based company offers a one-stop shop for the electronics market, encompassing design, manufacturing and supply chain management. 

Three-Month CLS Stock Price Performance

GenAI: CLS' Key Growth Driver

Celestica has benefited from the ongoing generative AI (GenAI) boom, thanks to the solid demand trends for AI/ML (machine learning) compute and networking products from hyperscale customers. In addition to the high-performance 800G family of network switches (which are vital for data centers that power AI applications) and storage solutions like the SC6100 controller and SD6200 platform (which provide efficient and scalable data storage for AI), Celestica offers Photonic Fabric – an optical compute and memory fabric solution capable of supercharging AI infrastructure. This transformational solution provides a foundational technology to advance AI while maintaining scalable, sustainable and profitable business models.

Leveraging such innovative products, the company has recorded solid revenue growth over the years. By integrating next-generation networking products with silicon photonics packaging solutions, Celestica aims to optimize supply chain solutions to reduce time to market. The data center switches combined with optical transceivers have the potential to handle and sustain high volumes of both inbound and outbound network traffic and cater to the demand for data center bandwidth for supporting AI/ML and data analytics applications.

Estimate Revision Trend

Earnings estimates for Celestica for 2025 have moved up 5.7% to $5.05 over the past 60 days, while the same for 2026 has improved 2.4% to $6.07. The positive estimate revision depicts optimism about the stock’s growth potential.

CLS Remains Skeptical of Macro Environment

Despite the healthy demand trends, Celestica remains skeptical of the dynamic macro environment owing to trade policy uncertainty. While the environment remains fluid with frequent policy adjustments, recent announcements have provided near-term clarity with the U.S. government offering temporary exemptions for key data center IT hardware, including servers and networking switches, which comprise the majority of its Connectivity & Cloud Solutions (CCS) segment. The company is collaborating with its customers to evaluate the evolving policy landscape and take necessary actions, clouding its near-term revenue prospects.  

Margin Woes: CLS' Perennial Concerns

Celestica remains plagued by margin woes. Its products are highly sophisticated and typically based on the latest technological innovations, which have historically led to high research and development costs. High operating expenses have contracted margins. This has dented CLS’ prospects to some extent.

Moreover, Celestica faces stiff competition from industry giants like Foxconn, Jabil, Flex and Sanmina Corporation. Several smaller companies operating at a regional level also intensify competition. The highly cyclical nature of the semiconductor industry further remains an overhang.

End Note

As the company scales up production volumes and costs go down, possible uses for silicon photonics are likely to soar across several industries, including automotive, data center and high-performance computing, telecommunications, medical, aerospace and defense. We believe that Celestica is well-positioned for sustained growth over the years, backed by its robust infrastructure investments, solid technology know-how and wide industry experience.

However, high operating expenses for highly technological products have hurt margins. Although CLS is currently witnessing intense volatility owing to challenging macroeconomic conditions, investors are likely to profit in the long run if they bet on this stock. With a Zacks Rank #3 (Hold), Celestia appears to be treading in the middle of the road, and investors could be better off if they trade with caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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