On Monday, analysts at Stifel upgraded Celestica Inc. (NYSE: CLS) from ‘Hold’ to ‘Buy,’ maintaining their price target at $58. This implies a potential upside of over 40% from current price levels.
The upgrade reflects Stifel’s confidence in Celestica’s ability to achieve a FY25 EPS of $4.00, despite anticipated declines in server sales due to a technology transition at a major customer.
Stifel believes that growth in Celestica’s communications segment, particularly driven by the 800-G switch investment cycle, will more than offset these declines, positioning the company for continued strong performance.
Celestica’s stock has shown significant resilience and growth this year, trading up 40% year-to-date (YTD) despite a 35% retracement from its all-time high in July.
This robust performance can be attributed to the company’s strategic positioning in high-growth areas such as AI and data centers, which have driven substantial demand for its Connectivity and Cloud Solutions (CCS) segment.
The CCS segment, which accounts for a large portion of Celestica’s revenue, reported a remarkable 51% year-over-year growth in Q2 2024, contributing to an overall 23% revenue increase during the quarter.
Celestica’s business growth and challenges
Celestica’s business is on solid ground, bolstered by consistent revenue growth and profitability improvements.
The company has been strategically shifting its revenue mix toward more profitable streams, with the CCS segment’s margin increasing to 7.2% in Q2 2024, up from 6.0% the previous year.
This shift is largely driven by the growing demand for high-performance networking products, such as 800G switches, which are essential for AI applications requiring high throughput and low latency.
This demand is expected to persist, with Celestica well-positioned to benefit from the ongoing expansion of data center infrastructure by its hyperscale customers.
However, it is important to note that Celestica operates in a highly competitive and volatile industry. The company’s reliance on a few key customers, who contribute a significant portion of its revenue, poses a risk to its business.
Any reduction in orders or delays from these customers could significantly impact Celestica’s financial performance.
Additionally, the company’s low margins, typical of the Electronic Manufacturing Services (EMS) industry, mean that even minor operational disruptions or macroeconomic shifts could substantially affect profitability.
Celestica Q2 results & valuations
Despite these challenges, Celestica’s Q2 2024 results were impressive. The company reported adjusted EPS of $0.91, exceeding expectations, with revenue reaching $2.39 billion—a 23.2% increase from the previous year.
This strong performance led management to raise their full-year 2024 outlook, now expecting revenue to hit $9.45 billion and adjusted EPS to reach $3.62.
In terms of valuation, Celestica’s stock is currently trading at a P/E ratio of around 14x, which aligns with industry averages but is higher than its historical norms.
This premium reflects the market’s recognition of Celestica’s growth potential, though it leaves little room for error. The company’s high customer concentration and the inherent volatility of its revenue streams mean that any missteps could lead to a significant re-rating of the stock.
With the fundamental factors covered, it’s time to delve into the technical side. Analyzing the charts will help determine whether Celestica’s recent rally has more room to run and if current price levels present a compelling opportunity for investors.
Celestica stock technical analysis
Celestica’s stock has experienced a significant uptrend since the second half of 2023, increasing fivefold over the past year. However, this strong rally encountered resistance last month, with shares peaking above $63 before pulling back by 35%.
While the stock remains in a long-term uptrend, its momentum has shifted downward in the short and medium-term charts.
Source: TradingView
Despite this, bullish investors might consider entering a long position at current levels, as the stock is trading near its medium-term support around $38.8.
As long as Celestica’s stock stays above this level, the likelihood of a rebound remains high.
For bearish traders, $38.8 is a critical level to watch as well. A break below this support could present an opportunity to initiate short positions.
If this level fails to hold, the stock could decline further to its 61.8% Fibonacci retracement near $30.8, where short sellers may look to take profits.
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