Celestica Inc. (CLS): Riding the AI Wave with Strategic Diversification and Margin Power

The tech sector's relentless shift toward artificial intelligence (AI) and cloud infrastructure has created a stark divide among suppliers: those capable of adapting to the new paradigm and those left behind. Celestica Inc. (CLS), a leader in electronics manufacturing and design, has positioned itself squarely in the former category. Q1 2025 results underscore its success, with revenue surging 20% year-over-year to $2.65 billion, exceeding guidance and highlighting a strategic pivot toward high-margin AI-driven solutions. For investors seeking resilience in a macro-uncertain environment, CLS offers a compelling blend of diversification and margin expansion that few peers can match.

Financial Strength Anchored by AI and Cloud Growth

Celestica's Q1 results were a masterclass in execution. The Connectivity & Cloud Solutions (CCS) segment, which now accounts for 69% of revenue, grew 28% year-over-year to $1.84 billion, with margins expanding to 8.0%—a full 120 basis-point improvement over 2024. This segment's Hardware Platform Solutions (HPS) division, directly tied to AI and cloud infrastructure, nearly doubled in revenue to $1 billion, reflecting soaring demand for advanced servers and storage systems.

The Advanced Technology Solutions (ATS) segment, which includes aerospace, defense, and healthtech, grew 5% to $810 million, with margins rising to 5.0%. While less flashy than CCS, ATS provides stability in a diversified portfolio, shielding CLS from sector-specific volatility.

What truly stands out is the margin trajectory. Adjusted operating margins hit 7.1%—a record for the company—and CLS now forecasts a full-year margin of 7.2%, up from 6.9% previously. This expansion is no accident. The scale benefits of its AI-focused CCS operations, coupled with operational efficiencies from lean manufacturing and supply chain optimization, are creating a virtuous cycle of profitability.

Diversification: A Shield Against Macroeconomic Uncertainty

The current tech landscape is defined by sector rotation—capital flowing out of legacy hardware and into AI-driven ecosystems. CLS's strategy mirrors this shift. By deepening relationships with hyperscalers (e.g., cloud providers building out AI infrastructure) and securing contracts for advanced server designs, CLS has transformed itself into a critical partner for the next wave of computing.

The company's design-to-manufacturing capability is its secret weapon. Unlike pure-play contract manufacturers, Celestica collaborates with clients on product development, embedding itself into the supply chain early. This vertical integration not only boosts margins but also reduces execution risk—a key advantage as AI hardware becomes more complex.

Meanwhile, its ATS segment acts as a stabilizer. Aerospace and defense sectors, though slower-growing, offer steady revenue streams and less cyclicality. This dual-play strategy ensures CLS isn't overexposed to any single market—a critical feature in an environment where trade tensions and inflation loom.

Margin Expansion: A Sustainable Trend or a One-Quarter Mirage?

Skeptics may question whether the margin gains are sustainable. After all, tariffs and supply chain disruptions have historically plagued the manufacturing sector. Here, CLS's proactive measures matter.

First, the company has successfully recovered tariffs from customers, excluding these costs from non-GAAP metrics. This structural adjustment, coupled with rising CCS volumes, ensures margin resilience. Second, its factories are now optimized for high-margin AI hardware, which commands premium pricing due to complexity and customization. Finally, the CCS segment's revenue mix is shifting toward HPS, which has higher margins than legacy products, further fueling expansion.

Risks, but Manageable Ones

No investment is risk-free. CLS faces headwinds, including potential macroeconomic slowdowns, trade disputes, and competition from rivals like Amphenol (AMP) and Foxconn. However, its diversified customer base (no single client accounts for >10% of revenue) and its ability to pass tariff costs to clients mitigate these risks.

Moreover, the AI hardware boom is structural, not cyclical. As companies like NVIDIA and AMD roll out ever-more powerful GPUs and accelerators, the demand for advanced server manufacturing will only grow. CLS is uniquely positioned to capture this upside.

Why Act Now?

Celestica's stock has lagged behind broader market gains this year, offering a buying opportunity. At current levels, the stock trades at a 14.5x P/E—a discount to its five-year average—despite record margins and accelerating growth. The raised guidance ($10.85 billion annual revenue, $5.00 EPS) suggests further upside, while $350 million in free cash flow provides a solid base for shareholder returns.

Conclusion: A Growth Catalyst in a Shifting Tech Landscape

Celestica is no longer just a contract manufacturer; it's a partner to the AI revolution. Its diversification into high-margin segments, combined with margin expansion fueled by operational excellence, makes it a rare blend of growth and stability. In a market hungry for companies that can thrive amid sector rotation and macro uncertainty, CLS offers a compelling entry point. For investors with a long-term horizon, this is a stock to buy—and hold—through the next phase of tech evolution.

Investor takeaway: Celestica's strategic pivot to AI infrastructure, coupled with margin resilience, positions it to outperform as the sector rotation accelerates. The stock's valuation and guidance suggest significant upside ahead.