A report by RaisingCapital on ValueInvestorsClub provides an investment thesis for Celestica Inc. (NYSE:CLS). We will summarize the bullish stance of the author in this article. CLS shares were trading at $50.00 when the valuation of CLS was done by RaisingCapital, vs. the closing price of $93.82 on Dec 31.
Celestica Inc. provides supply chain solutions in North America, Europe, and Asia through its two segments: Advanced Technology Solutions (ATS), and Connectivity & Cloud Solutions (CCS). The range of services in these segments is broad and includes product manufacturing and related supply chain services, engineering services, systems integration, product licensing and after-market services. It has also forayed into hardware platform solutions that include the development of infrastructure platforms along with hardware and software design solutions.
The CCS segment registered a 51% growth in Q2-24 on a y-o-y basis, fueled by a 93% surge in the hyperscaler portfolio primarily in enterprise and communications markets. Hyperscaler revenue is expected to exceed $4.6 billion, accounting for more than 70% of CCS revenue. The growth trajectory in this space is expected to continue due to a strong demand for AI/ML solutions. The current penetration of accelerated computing stands at a meager 2.7% with the demand remaining robust at least for the medium term.
ATS segment revenue shrank by 11% due to macro headwinds but it is expected to remain positive in the next few years. The growth is expected to be fueled by large tech giants that have a robust balance sheet to sustain high levels of capex and would prefer overspending instead of lagging behind their peers in developing AI capabilities.
Gross margin has increased by 300 bps to 10% and is expected to expand further to 12% due to the growth in high-margin AI business. With a 10x EBITDA multiple and a 16x P/E multiple, CLS trades close to its intrinsic value. The value has been obtained assuming revenue growth to be 24% in 2025, 18% in 2026 and a more sustainable 10% for the long term. However, the recent performance highlights that these figures can be easily surpassed if industrial demand remains strong and new AI projects bear fruition.
While we acknowledge the potential of CLS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CLS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.