Celestica: Overvalued and Overexposed – Time to Exit Before the Tide Reverses

The EMS (Electronic Manufacturing Services) sector has been a goldmine for investors riding the AI and cloud computing boom. Celestica (CLS), a leader in this space, has capitalized on this trend, with its stock soaring 20% year-to-date. But beneath the surface, a perfect storm of overvaluation, insider skepticism, and looming competitive threats suggests it's time to take profits before the tide turns.

1. Valuation Metrics: Overpriced Relative to Industry and History

Celestica's P/S ratio of 1.58 and EV/EBITDA of 16.11 are flashing red flags. Both metrics are significantly worse than the Hardware industry median (1.48 and 11.22, respectively). The P/S ratio is also near its 10-year high of 1.68, despite the EMS sector's growth slowdown post-2024. Meanwhile, its EV/EBITDA has surged to levels not seen since 2010, when the company faced operational crises.

This overvaluation isn't justified by fundamentals. While Q1 revenue rose 20% year-over-year, the margin expansion has stalled. Even GuruFocus flags CLS as overvalued, with a price-to-GF-Value ratio of 4.52. In a sector where peers trade at lower multiples, Celestica's premium feels precarious.

Ask Aime: Is Celestica a good stock to hold during the AI boom?

2. Insider Sales: A COO's Exit Signals Trouble

Insider activity often mirrors confidence—or a lack thereof. Yann Etienvre, Celestica's COO, unloaded $10.17 million worth of shares in February 2025, a move far exceeding the $1.17 million often cited. This wasn't a minor sale; it liquidated his entire direct ownership. While he received RSUs post-sale, the timing is telling.

Etienvre's actions align with broader trends: 16 insider sales and zero buys in the past year. Such behavior is rare for a company in a growth phase. When executives abandon their equity stake at record highs, it's a contrarian signal to heed.

3. Gross Margins: The Slight Dip Heralds Larger Risks

Despite a five-year upward trend in gross margins—from 7.03% in 2020 to 10.72% in 2024—the March 2025 quarter saw a drop to 10.34%, breaking the trajectory. While temporary, this decline reflects mounting pressures in a saturated EMS market.

Competitors like Flex Ltd. and Amphenol Corp. are aggressively cutting costs and expanding into AI-driven niches, squeezing Celestica's pricing power. The Connectivity & Cloud Solutions segment, once a profit engine, saw margins slip to 8.0% in Q1—down from 8.8% in 2024. This segment accounts for 70% of revenue, making its softness a critical warning sign.

4. The AI Demand Slowdown: Growth is Peaking

Celestica's recent success hinged on AI-driven demand for data center hardware and cloud infrastructure. But post-2024, the AI hype cycle is maturing. Major clients like NVIDIA and AWS are scaling back capital expenditures as they optimize existing infrastructure.

Celestica's raised 2025 outlook (C$10.85 billion in revenue) assumes continued AI adoption, but the Q1 revenue growth of 20% is already below the 2024 average. In a sector where demand is cyclical, overvaluation and margin pressure make the stock vulnerable to a correction.

Conclusion: Take Profits Now – The Risks Outweigh the Rewards

Celestica's stock is a classic case of “buy the rumor, sell the news.” While its AI-driven growth story has been compelling, the valuation, insider skepticism, and margin pressures suggest the upside is limited. With the EMS sector becoming increasingly crowded and AI demand peaking, Celestica's premium multiple is at risk of collapsing.

Investment Action:
- Downgrade to SELL.
- Target price: Align with industry multiples (EV/EBITDA 11.22), which would imply a 30% downside from current levels.
- Risk: Continued AI hype or an unexpected client win could delay the correction, but the contrarian risks are too stark to ignore.

The time to exit is now. Let others chase the next AI breakthrough—your portfolio will thank you.