Dubbed a “freight train” by CNBC’s Jim Cramer, Toronto-based electronics manufacturer Celestica (TSX:CLS)(NYSE:CLS) has become a major beneficiary of the artificial intelligence boom, helping its stock soar 190% this year. The company is a critical partner for tech giants building out their AI infrastructure, but its soaring valuation now poses a considerable risk for potential investors. While its growth is undeniable, its expensive price tag warrants a cautious approach.
What does Celestica do?
Celestica designs, builds, and delivers essential hardware products for a wide range of industries. Its business is split into two segments: Advanced Technology Solutions (ATS), which serves high-precision markets like aerospace and health tech, and Connectivity and Cloud Solutions (CCS), which is driving its recent success. The CCS division provides servers, storage, and networking equipment for data centers, making it a key supplier for hyperscalers like Google, Meta, and Microsoft as they expand their AI capabilities.
Its business has been booming, and so too has its stock price
The company’s financials reflect this surging demand. In the first six months of the year, Celestica’s revenue grew 20% year-over-year to $5.5 billion. The business operates on the thin margins typical of the hardware industry, but it remains profitable, booking a net income of $297.2 million over the past two quarters.
However, this rapid ascent has pushed Celestica’s valuation into expensive territory. The stock trades at close to 60 times its trailing earnings and carries a forward price-to-earnings ratio of 37. Analysts also appear cautious, with a consensus price target below its current trading price, suggesting the stock may be overextended.
Is Celestica stock a good buy?
Given its high valuation and dependence on the continued strength of AI spending, Celestica is best suited for growth investors with a high tolerance for risk. While the company is well-positioned to capitalize on a powerful long-term trend, those seeking a larger margin of safety may find the stock too pricey after its impressive gains this year.