Reincarnation Through AI Opportunity

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Stock Pick: Celestica (CLS-US, $15.0B MCAP)

“Quality means doing it right when no one is looking” – Henry Ford.

Sometimes you stumble upon a company that has been quietly powering the world’s tech supply chain for decades—and then, out of nowhere, it reinvents itself in a way that makes you sit up and take notice. Enter Celestica.

This isn’t your everyday contract manufacturer announcement. We’re talking about a blockbuster move: a multi-hundred-million-dollar investment in next-generation smart manufacturing that’s poised to disrupt traditional electronics production.

However - we’ve also got a very attractive near-term kicker here through the AI opportunity that has presented itself.

I love me a story with a blue sky upside. Even better coming from a company with already extensive expertise in the industry. It’s not only startups that can break the innovation mold!

You might ask, “How does a firm known for its steady, reliable operations suddenly become the poster child for digital reinvention?” Well, buckle up. Celestica’s strategic pivot is rewriting the playbook, blending decades of manufacturing expertise with cutting-edge technologies that promise to reshape the industry landscape for the modern era.

• Why Now? 👉 The AI Investment Cycle Is in Full Swing

• Overview 👉 What Does Celestica Do?

• Operating Segments 👉 Advanced Technology Solutions + Connectivity  and  Cloud Solutions

• Long-Term Play 👉 Embracing Smart Manufacturing

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Why Now? 👉 The AI Investment Cycle Is in Full Swing

Recent trends indicate that the global push for AI is accelerating. On one hand, AI’s data processing demands are driving renewed investments in data center infrastructure. On the other, efficiency gains in AI hardware—exemplified by major players like Google—are reshaping spending patterns. Celestica finds itself at the nexus of these shifts, which is critical for its near-term outlook. Celestica has two facets of AI Exposure:

Networking for Data Centers: Networking components are the backbone that connects all computers within a data center. Celestica manufactures these critical pieces of hardware, enabling seamless communication among servers. However, a noteworthy trend is emerging: as AI models become more efficient, data centers may consolidate into smaller clusters. Smaller clusters could translate into less overall demand for traditional networking equipment. Yet, this scenario also opens a window for innovation—demand may shift toward specialized, high-performance networking gear tailored for AI applications rather than bulk purchases of standard components. This is where Celestica fits in.

Google’s AI Servers: Google is a major customer for Celestica, representing 25% of its Q3 2024 revenue and an estimated 30% of 2024E revenue. If Google’s new AI server models are far more efficient, this could trigger an upgrade cycle. Higher margins on advanced, premium products might offset the lower unit volumes if Google opts for more sophisticated systems that require Celestica’s specialized expertise.

Overview 👉 What Does Celestica Do?

Celestica has long been known as the dependable backbone behind complex manufacturing and supply chain operations.

At its core, Celestica not only assembles electronic components—it creates integrated solutions that drive innovation. The company’s services cover the entire product lifecycle: from the initial concept and design engineering to large-scale manufacturing and post-production supply chain management. In today’s fast-paced digital age, Celestica is leveraging its longstanding expertise while embracing Industry 4.0 trends to help its clients achieve faster time-to-market and superior product performance.

With a legacy spanning several decades, the company has earned its reputation for precision, reliability, and consistent quality. Today, that legacy is evolving under the pressure of digital transformation and the AI revolution.

The way to think about this stock is that the manufacturing capabilities act as a floor value with a lot of AI networking upside over the shorter term.

Operating Segments 👉 Advanced Technology Solutions + Connectivity and Cloud Solutions

Celestica’s business is built around two core divisions that together drive its performance, each addressing different end markets with complementary strengths.

Advanced Technology Solutions (ATS)

The ATS segment is dedicated to serving high‐reliability markets that demand precision, safety, and innovation. It is comprised of several specialized industries:

Aerospace and Defense (A&D): Celestica’s A&D business supports critical defense systems and aerospace applications. This part of the ATS segment is known for its stringent quality requirements and long-term customer relationships, ensuring that even in volatile markets, revenue stability is maintained.

Industrial: Under the industrial umbrella, Celestica leverages its manufacturing capabilities to produce components and systems for various industrial applications. This unit benefits from trends in automation and digitalization.

HealthTech: The HealthTech portion of ATS is focused on delivering manufacturing and supply chain solutions for medical devices and healthcare-related electronics. In a market that values precision and regulatory compliance, HealthTech serves as a critical growth lever, especially as global demand for health technology increases.

Capital Equipment: Capital Equipment is perhaps the most multifaceted part of ATS, encompassing industries such as semiconductors, display technologies, and robotics. With increasing investments in digital transformation, the capital equipment business is positioned for growth—even though it sometimes faces headwinds from cyclical market conditions.

Connectivity & Cloud Solutions (CCS)

The CCS segment focuses on the high-growth areas of communications and enterprise IT, delivering products and services that are essential for today’s digital infrastructure:

Communications: This component of CCS serves the rapidly evolving communications market, supplying components and systems that enable robust, high-speed networks. With the telecommunications industry constantly upgrading to 5G and beyond, revenue from this sub-segment has grown significantly.

Enterprise (Servers and Storage): The enterprise part of CCS covers the design and production of critical IT infrastructure, including servers and storage systems. These products support data centers and cloud computing environments, which are experiencing rapid expansion. This is the secret sauce - more on this in the ‘By the Numbers’ Section.

Though ATS and CCS serve distinct markets, their integration allows Celestica to leverage broad manufacturing expertise and a global supply chain. The stability of ATS helps cushion cyclical fluctuations, while CCS’s rapid growth in digital infrastructure supports higher overall margins and revenue expansion.

Long-Term Play 👉 Embracing Smart Manufacturing

At the heart of Celestica’s transformational journey is its bold embrace of smart manufacturing. The SMARTSHIFT initiative is not a superficial upgrade—it’s a fundamental reengineering of how the company operates, designed to embed digital intelligence into every facet of production.

Automation & Robotics: Celestica is integrating AI-driven robotics across its production lines to boost precision, speed, and consistency. These systems are more than just mechanized arms; they are part of an interconnected network that learns and adapts, significantly reducing human error and maximizing throughput. This shift is expected to streamline production cycles and lead to substantial cost savings.

IoT & Data Analytics: A network of IoT sensors is being deployed throughout Celestica’s facilities to capture real-time data on every aspect of the manufacturing process. By harnessing advanced analytics, the company can perform predictive maintenance, optimize quality control, and fine-tune operations on the fly. This data-driven approach is a game-changer, allowing Celestica to anticipate challenges before they disrupt production and to continually improve its processes.

Digital Twin Technology: Celestica is also exploring digital twin technology—creating virtual replicas of its production environments. These digital twins allow for rigorous simulation of process changes, performance forecasting, and risk-free testing of new strategies. This innovation offers a proactive path to efficiency, enabling rapid adjustments and continuous process optimization without the risks associated with physical trial-and-error.

The benefits of this smart manufacturing revolution are expected to be far-reaching. Increased efficiency, reduced production costs, faster turnaround times, and enhanced profit margins are just the tip of the iceberg. As global demand for agile, digitally enabled manufacturing soars, Celestica’s transformation is set to elevate the company from a reliable workhorse to an industry trailblazer - the future of manufacturing!

By The Numbers 👉 Key Metrics

Let’s start with the growth kicker, then move to the most recent quarter update.

CCS was the real engine of growth in Q4 2024, posting revenue of about $1.74 billion—a 30% jump year-over-year. Notably, within CCS, the Hardware Platform Solutions business surged by 65% to reach $0.8 billion in revenue, reflecting strong demand for AI-optimized and data center components. Here is the market opportunity that Celestica plays in:

To understand the mix shift, we look at the 2025 Annual outlook to see where the focus is. The chart below shows that ATS will run flat, while CCS will grow in the “mid-double digit” percentage range on a YoY basis. This will be driven primarily by AI/ML networking demand.

Zooming out to look at the entire company’s financials, we are seeing strong, stable growth, with reliable and improving profitability metrics:

• Revenue Growth: Q4 revenue jumped to $2.55 billion (↑19% YoY), contributing to a full-year revenue of $9.65 billion—a 21% increase over 2023.

• Earnings Performance: GAAP EPS in Q4 surged to $1.29 from $0.77 last year, while adjusted EPS climbed from $0.77 to $1.11. For 2024, GAAP EPS reached $3.61 and adjusted EPS hit $3.88.

• Operating Margins: GAAP earnings from operations improved from 5.1% to 8.0% in Q4, while adjusted operating margins increased from 6.0% to 6.8%.

• Segment Strength: CCS revenue of $1.74 billion marks a 30% increase YoY, with the Hardware Platform Solutions within CCS growing 65% to $0.8 billion. Meanwhile, ATS revenue remained stable at $0.81 billion.

• Share Repurchases: The company repurchased 0.3 million shares for $25.5 million in Q4, signaling confidence in its financial positioning.

Risks 👉 Potential Pitfalls

AI Opportunity: Celestica’s near-term AI opportunity is significantly tied to Google, which currently represents 25% of its Q3 2024 revenue and is projected to account for about 30% of 2024E revenue. If Google’s new, more efficient AI server technology reduces the number of servers needed, Celestica may face a decline in hardware orders, adversely affecting its revenue and margins. Moreover, any delays or strategic changes in Google’s AI upgrade cycle could introduce substantial volatility and uncertainty into Celestica’s financial performance, thereby heightening investment risk.

Dependence on Legacy Processes: Despite the bold investments in digital transformation, a substantial portion of Celestica’s operations still relies on legacy manufacturing processes. Transitioning from traditional to smart manufacturing involves significant operational risks, including potential disruptions during integration and resistance from a workforce accustomed to established methods.

Competitive Pressures: The electronics manufacturing landscape is fiercely competitive, with established players and emerging startups alike vying for market share. To stay ahead, Celestica must continually innovate and maintain its reputation for quality. Failure to do so could result in margin compression and lost business to more agile competitors.

Integration and Implementation Challenges: Rolling out SMARTSHIFT across a global manufacturing footprint is an enormous undertaking. Technical glitches, delays in technology adoption, or challenges in integrating new systems with legacy infrastructure could slow down the anticipated benefits. Execution risk remains one of the most critical factors in determining the success of the transformation.

Wrapping Up…

Celestica’s strategic positioning amid the AI investment cycle is a dual-edged sword that blends the stability of its traditional manufacturing base with the explosive growth potential of digital transformation.

With CCS driving significant revenue increases and deep customer ties to tech giants like Google, the company stands to capture substantial upside from the AI revolution, even as it navigates inherent risks.

For investors, Celestica represents a compelling play at the intersection of legacy reliability and innovative opportunity—a true transformation story in the age of AI.

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Cheers,

The GRIT Alpha Team

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