Celestica: The Dark Horse Of AI Infrastructure
Up 4x in 2024, & still enough room for margins to grow and shareholders value to expand.
«The 2-minute version»
Nvidia Won AI’s First Round, But Who’s Up Next? Nvidia ruled the AI hardware game so far, supplying everything from GPUs to networking. But as the AI infrastructure market matures, hyperscalers like Microsoft and Meta Platforms are looking to cut costs and optimize data center spending rather than blindly throw money at the AI arms race. Enter Celestica, an under-the-radar player quietly winning key AI networking deals.
Celestica’s Glow-Up: From Factory Worker to Architect: Traditionally an electronics manufacturing services (EMS) firm, Celestica has transformed into an original design manufacturer (ODM), meaning it not only builds but also designs high-tech networking solutions. This shift lets Celestica charge a premium, boost margins, and expand its footprint in AI data centers. Big Tech wants more efficient yet complex, custom-built infrastructure, and Celestica is happy to deliver.
2024 Was a Banger—What’s Next? Celestica’s stock soared 200% in 2024, powered by a 40% jump in its Connectivity & Cloud Solutions (CCS) segment. It even became the fastest-growing player in the Ethernet Data Center Switch market. Now, it’s doubling down on AI networking, winning contracts to build next-gen 1.6Tb Ethernet switches and full-rack AI infrastructure solutions, even edging out major OEMs like Dell and Super Micro.
Margins, Margins, Margins! Despite playing in a market where peers like Arista Networks enjoy 40%+ gross margins, Celestica is improving fast, expanding its gross margin to 10.7% and operating margin to 6.4% in 2024. By moving up the value chain with high-end AI infrastructure services, Celestica is positioning itself for long-term profitability and investor-friendly free cash flow growth.
Undervalued with Room to Run: Celestica’s projected $10.7 billion in 2025 revenue reflects strong momentum, even as growth normalizes from 2024’s surge. With expanding margins and improving operational efficiency, the company is positioning itself as a key player in AI infrastructure. Despite this, the market has yet to fully recognize its transformation, leaving room for significant upside. Read below to unlock our valuation model and price target.
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Let’s Set The Stage
No company on this planet could have possibly won the AI Renaissance that started in 2022 like Nvidia NVDA 0.00%↑ did.
Nvidia had its products in every aspect of the data center, ranging from its GPUs, GPU systems, switches, wires, etc. But, two years on from the OpenAI moment that shook the world, opportunities have opened up in the AI infrastructure as the market begins to mature.
In AI infrastructure, the market’s biggest customers, hyperscalers such as Microsoft MSFT 0.00%↑ and Meta Platforms META 0.00%↑ are looking to get more efficient with how they spend their capex budgets rather than throw money at attempting to win the AI race.
Networking is one key area in the AI data center that hyperscalers are looking to become more efficient, and one relatively unknown company has been quietly winning hyperscaler clients and forging strong relationships with key AI partners—Celestica CLS 0.00%↑.
We strongly believe Celestica is primed to keep winning in the next evolution of hyperscalers’ capex budgets and continue to add this stock to our portfolio.
Background On Celestica & Its AI Business Pivot
🛑 👉 We recommend reading our free field guide on AI data center networking first, which will enable you to understand Celestica’s growth story and the networking industry it operates in, a lot better.Celestica is a Toronto, ON-based company in Canada that offers a wide range of manufacturing services for electronic products & services.
That wide range of services typically involves Celestica working with its clients on electronic products that are custom-designed for specific needs, right from design & development to component sourcing, manufacturing, and systems integration, along with after-market repair & support.
Celestica’s business model is typically that of an Electronics Manufacturing Services company or EMS, that wins manufacturing contracts from Original Equipment Manufacturers or OEMs. An example here to illustrate Celestica’s relationship as an EMS company with some of its OEM customers such as Dell DELL 0.00%↑ or Hewlett-Packard Enterprise HPE 0.00%↑ is the manufacturing solutions Celestica provides for Dell or HPE’s AI server products.
Over the last 12-18 months, hyperscalers such as Amazon AMZN 0.00%↑, Google GOOG 0.00%↑, Meta Platforms have shown more interest in custom building their own servers or designing their own data center networks, thus allowing Celestica to transition its business model from that of an EMS company to that of an Original Design Manufacturer, or ODM, as it designs and manufactures electronic products often for hyperscalers while retaining the IP and design rights in most cases.
What this pivot in the business model means is Celestica works with hyperscalers not only during manufacturing but also during the design phase, allowing the company to charge a premium for its services and enabling it to expand margins, which we will demonstrate below.
Celestica has two main cohorts of customers. Connectivity & Cloud Solutions, or CCS, segment is the company’s headlining revenue segment, which includes its prime Hardware Platform Solution, or HPS, customers such as hyperscalers. The other business segment is the Advanced Technology Solution, or ATS, segment, which is focused on non-CCS end markets such as industrial, energy, health technology, etc.
Examples of the types of products Celestica manufactures are storage controllers, interconnects, networking routers & switches, etc., all key components of the data center.
Celestica’s AI Market Share Win Is Its Strongest Stamp Of Approval
Celestica has enjoyed a phenomenal year in 2024, with its stock returning over 200% to investors last year.
The reason for Celestica’s outperformance in 2024 is the strong double-digit growth in its revenues, which grew ~21% to $9.6 billion. At first the 21% revenue growth does not sound like much, but when one layers in more context, such as comparing Celestica’s revenue growth in 2024 versus that in 2023, it becomes clearer how revenue growth is accelerating from 10% revenue growth in 2023 to 21% growth in 2024, i.e., Celestica’s growth pace accelerated by 2x last year.
Additionally, comparing Celestica to some of its peers adds more context to the company’s standout performance in 2024, as can be seen below.
Moreover, Celestica was the fastest-growing market player in the Ethernet Data Center Switch market last year, according to the Dell’Oro Group, which reiterates Celestica’s growth progress last year.
Celestica’s CCS segment has been the breadwinner in the company’s 2024 revenue performance as Celestica’s HPS customers ramp up their capex budgets towards designing their own custom AI infrastructure & networking solutions.
In fact, Celestica’s 2024 growth was entirely due to its CCS segment, which grew by 40% in 2024 to $6.5 billion last year. The strong growth in 2024 was enough to offset the weakness in Celestica’s ATS segment, which also appears to have finally bottomed out, as can be seen below.