Artificial intelligence (AI) stocks have taken a hammering lately, as investors have been rotating out of this sector due to multiple concerns, such as circular financing, competition from China, and the viability of the enormous sums being spent on AI data center infrastructure.
The Global X Artificial Intelligence & Technology ETF, an exchange-traded fund that invests in companies benefiting from the proliferation of AI by integrating this technology into their operations, along with companies selling AI-related hardware and software, has shed 8% of its value over the past month.
However, AI hardware specialists continue to clock impressive growth, suggesting that the recent downturn in this sector may not be long-lasting. Celestica (CLS -6.00%) is the latest company to report solid results and raise its annual guidance, following impressive reports from companies such as ASML and Taiwan Semiconductor Manufacturing in July.
This contract electronics manufacturer, which counts Broadcom (AVGO +0.37%), Intel, and Advanced Micro Devices as its key customers, has seen its shares slide 12% over the past three months. However, this pullback is an opportunity for savvy investors to buy a top AI stock at a really attractive valuation. Let's look at the reasons why.
Image source: Getty Images.
Celestica's revenue and earnings are increasing at a terrific pace
Celestica provides electronics manufacturing services (EMS) to various industries, such as data center and networking, aerospace and defense, healthcare, industrial, semiconductor manufacturing, and supply chain management. Its connectivity and cloud solutions (CCS) business has been experiencing outstanding growth lately, driven by robust demand for its networking switches deployed by the leading chip designers mentioned earlier.
NYSE: CLS
Key Data Points
This explains why Celestica's revenue increased by an impressive 62% year over year in Q2 to $4.7 billion. Even better, the company's earnings per share rose 83% year over year to $2.54. Celestica's guidance was the icing on the cake, with the company now expecting 2026 revenue to land at $20.5 billion, up from its prior guidance of $19 billion. It has also raised its non-GAAP earnings per share guidance to $11.30 from the earlier estimate of $10.15.
The updated guidance points toward a 65% jump in revenue from last year. Meanwhile, earnings per share are now expected to grow by 87%. More importantly, Celestica management noted in its earnings press release that its revenue growth rate will accelerate next year. Its adjusted earnings per share will continue to grow faster than revenue in 2027.
I won't be surprised to see Celestica's growth accelerating beyond next year, thanks to its partnerships with the likes of Broadcom, Intel, and AMD. Broadcom, for instance, reported a 143% year-over-year increase in its AI semiconductor revenue in the previous quarter to $10.8 billion. The company anticipates a 200% year-over-year increase in AI revenue in the current quarter to $16 billion.
What's more, Broadcom is confident of achieving more than $100 billion in AI revenue next year, indicating a significant improvement in the quarterly revenue growth rate of its AI business. Also, Broadcom has lucrative long-term agreements to deploy custom AI processors for major hyperscalers, which will be a tailwind for Celestica.
So, it is easy to see why analysts have become even more bullish regarding Celestica's bottom-line growth prospects over the next three years.
Data by YCharts
The stock's valuation and upside potential make it a no-brainer buy
The recent slide in Celestica's shares explains why it is trading at 36 times earnings, a small premium to the tech-laden Nasdaq-100 index's earnings multiple of 33. The stock should ideally trade at a larger premium, given the impressive earnings growth it is clocking and the sharp earnings jump Celestica could deliver through 2028.
Assuming Celestica's earnings reach $26.96 per share in 2028, and it trades in line with the Nasdaq-100 index's multiple of 33 at that time, its stock price could jump to $890. That's nearly 2.7x its current stock price, suggesting that investors should consider buying this tech stock before it starts soaring.
