Celestica (CLS): Why AI and Defense Tailwinds Make This Stock a Buy

Celestica (CLS), a global leader in electronics manufacturing services (EMS), is positioned at the intersection of two transformative megatrends: the explosion in AI infrastructure demand and the growing need for advanced defense technologies. With its Hardware Platform Solutions (HPS) segment driving record growth, Celestica is not only outperforming peers but also trading at a valuation that understates its potential. Let's dissect why this stock is primed for a re-rating.

The Growth Engine: AI and Cloud Infrastructure

Celestica's HPS segment—now part of its Connectivity & Cloud Solutions (CCS) division—is the company's crown jewel. In Q1 2025, HPS revenue soared 99% year-over-year to $1.0 billion, fueled by hyperscalers' insatiable appetite for AI-enabled data center hardware. The CCS segment as a whole grew 28% YoY, with margins expanding to 8.0%, reflecting operational efficiency gains.

The company's expertise in designing and manufacturing high-performance computing (HPC) systems, storage arrays, and networking gear positions it to capitalize on the AI boom. For instance, Celestica is a key supplier to leading cloud providers and semiconductor firms, where demand for 800Gbps Ethernet switches and advanced AI accelerators is surging.

Defense Diversification Adds Ballast

While the AI/cloud narrative is compelling, Celestica's pivot into defense and industrial markets is equally strategic. The company's work on ruggedized systems, satellite communications gear, and cybersecurity hardware has expanded its addressable market. This diversification reduces reliance on cyclical tech demand and aligns with global defense spending trends—projected to grow at 4-5% annually through 2030.

Financials: Growth, Margin Expansion, and Analyst Optimism

Celestica's Q1 results were a masterclass in execution:
- Revenue: $1.84 billion for CCS, with HPS contributing over half of that.
- Margin: CCS segment margin hit 8.0%, up from 6.9% in Q1 2024.
- Guidance: Full-year revenue raised to $10.85 billion (up from $10.70 billion), with EPS guidance increased to $5.00 (from $4.75).

Analysts are taking notice. The stock sports a "Strong Buy" consensus from 9 analysts, with 7 of 9 rating it "Buy." Barclays recently upgraded CLS to "Overweight," citing its "best-in-class exposure to AI infrastructure."

Valuation: A Forward P/E That Doesn't Do Justice

At a forward P/E of ~33x, Celestica's valuation might seem high. But this multiple is far below its growth rate. Analysts project 29.7% EPS growth in 2025, with 2026 estimates rising to ~23%. Using a PEG ratio (P/E divided by growth rate), the stock trades at a PEG of 1.14x, which is reasonable for a company with such high-margin, recurring revenue streams.

Moreover, the average analyst price target of CAD 174.59 (as of June 2025) implies 17% downside from recent highs. However, this target may underprice the stock's potential if AI adoption accelerates or defense contracts materialize.

Catalysts to Watch

1. Q2 Earnings (July 22, 2025): Management will likely reaffirm its upward guidance, with EPS expected to hit $1.22, fueling momentum.
2. HPS Penetration: The segment's 99% YoY revenue growth in Q1 suggests a structural shift, not a one-off.
3. Defense Wins: The launch of its ES1500 enterprise switch (June 2025) and partnerships with aerospace firms could unlock new revenue streams.

Risks on the Radar

• Margin Pressures: The Advanced Technology Solutions (ATS) segment saw margins dip to 4.6%, a drag on overall profitability.
• Trade Tensions: Tariffs and supply chain disruptions could weigh on costs, though Celestica has largely passed these on to customers.

Investment Thesis

Celestica is a "value-growth" hybrid—a stock with robust fundamentals and a clear path to outperforming its valuation. The AI and defense tailwinds are structural, not cyclical, and the company's operational improvements suggest margin upside.

Buy at current levels, especially if the stock pulls back toward CAD 160-170, which could happen ahead of earnings. The 2025 EPS target of $5.00 and 2026 estimates suggest a fair value of CAD 200-220, implying 10-30% upside.

Celestica isn't just keeping up with the AI revolution—it's helping build it. This is a stock to own for the next phase of tech-driven growth.