Celestica Shares Retreat as Tech Sector Reels From China's DeepSeek AI Chatbot

Celestica Inc. (CLS) shares have experienced a recent retreat, mirroring the broader tech sector's pullback, as investors grapple with the implications of China's DeepSeek AI chatbot. The chatbot, developed by a Chinese startup, has sparked concerns about the potential impact on established tech giants like NVIDIA and AMD, which Celestica supplies with critical hardware components. This article explores the implications of this development on Celestica's stock performance and its long-term growth prospects.



Celestica's exposure to the AI infrastructure market, particularly its involvement with hyperscalers, significantly impacts its long-term growth prospects. The company's role as a critical hardware supplier for AI workloads, including high-performance servers, storage systems, and networking equipment, positions it well in a fast-transitioning industry. This is evident in the following points:

1. Growing demand for AI technologies: As enterprises, especially big tech companies, invest heavily in AI technologies, Celestica benefits from this increased demand. The company's ability to supply components and system essentials for these cutting-edge solutions has positioned it as a trusted partner of several major hyperscalers (Celestica, 2024).
2. Improving margins and strong financial performance: Celestica's recent performance demonstrates the positive impact of its involvement in the AI infrastructure market. The company has reported significant improvement in margins, contributing to a strong business outlook and balance sheet. The shift towards the CCS business, which caters to enterprise, telecom, and cloud customers, has been an important factor in these improving margins (Celestica, 2024).
3. Positive growth prospects and stock price forecasts: Analysts expect Celestica to grow its earnings by 15.8% in 2025, which is practically in line with the company's own forecasts. This growth rate, combined with a price-to-earnings ratio of 24, leads to a price-to-earnings-to-growth (PEG) ratio of 0.86, indicating that the stock is heavily discounted compared to the information technology sector (Celestica, 2024).
4. Expanding industrial diversity and customer base: Celestica's involvement in the AI infrastructure market is part of its broader strategy to expand its industrial diversity and customer base. This diversification helps the company mitigate risks and capitalize on emerging opportunities in various high-growth, technology-driven markets (Celestica, 2024).



Celestica's recent financial performance highlights the company's strong fundamentals and growth prospects. In Q3 2024, the company reported a 22% year-over-year revenue growth, driven by a 42% surge in its Connectivity & Cloud Solutions (CCS) segment. The company's non-IFRS operating margin increased to 6.7% in Q3 2024, up from 5.7% in Q3 2023, primarily due to greater operating leverage and favorable product mix shifts. Celestica's CCS segment margin improved to 7.6% in Q3 2024, up from 6.2% in Q3 2023, contributing to the overall margin expansion.

Celestica's Earnings Growth and Cash Flow

Celestica's adjusted EPS grew by 60% year-over-year in Q3 2024, reaching $1.04. The company's adjusted free cash flow surged to $74.5 million in Q3 2024, up from $34.1 million in Q3 2023. These strong financial results demonstrate Celestica's ability to capitalize on the growing demand for AI technologies and its successful execution in the market.

Celestica's Growth Forecasts and Valuation

Celestica's 2025 outlook calls for higher year-over-year revenues and non-IFRS operating margin, which would represent 15% annual growth in its non-IFRS adjusted EPS. Despite the recent market volatility, Celestica's stock is trading at just 24 times forward earnings, with a price-to-earnings-to-growth (PEG) ratio of 0.86, indicating that the stock is heavily discounted compared to the information technology sector.

Analyst Ratings and Price Targets

On TipRanks, Celestica stock comes in as a Strong Buy based on six Buys and two Holds assigned by analysts in the past three months. The average CLS stock price target is $79.88, implying over 14% downside potential. This suggests that analysts remain bullish on Celestica's long-term prospects, despite the recent market volatility.

Conclusion

Celestica's exposure to the AI infrastructure market, particularly its involvement with hyperscalers, contributes to its long-term growth prospects by driving demand for its products, improving margins, and expanding its customer base. Despite the recent market volatility and the retreat of Celestica shares, the company's strong fundamentals and growth prospects remain intact. Investors should consider Celestica's discounted valuation and positive growth prospects when evaluating potential entry points. However, it is essential to conduct thorough due diligence and not rely solely on the information provided in this article.