Back to top

Image: Bigstock

Is CLS a Buy Now as AI Growth Collides With Premium Valuation Risks?

Read MoreHide Full Article

Key Takeaways

  • Celestica trades at 16.79X forward earnings, above its sub-industry's 16.39X but below the sector's 19.25X.
  • CLS saw CCS revenues surge 102% in Q3 2026, driven by 68% networking and 242% Compute & Storage growth.
  • Celestica cut its 2026 free cash flow outlook to $460M from $600M amid rising inventory and capital demands.

Celestica Inc. (CLS - Free Report) is delivering rapid AI-driven growth, higher margins and rising earnings expectations, but the stock no longer carries an obvious valuation discount. Investors are paying a premium to the company’s sub-industry while Celestica commits more capital to meet projected demand.

That creates a clear trade-off. The operating story remains powerful, but the investment case increasingly depends on Celestica converting exceptional growth into durable cash generation without losing efficiency as capacity expands.

CLS Growth Case Is Strong but Valuation Is Less Cheap

CLS trades at 16.79X forward 12-month earnings, above the 16.39X multiple for the Zacks sub-industry. That premium is modest, but it means the market is assigning additional value to Celestica’s growth profile.

Zacks Investment Research
Image Source: Zacks Investment Research

The multiple remains below the 19.25X Zacks Computer and Technology sector level. Still, sustaining a premium to the sub-industry requires continued earnings expansion and disciplined execution, particularly as the company scales quickly.

Celestica’s AI Exposure Supports Rapid Expansion

Connectivity & Cloud Solutions revenues climbed 102% year over year to $4.87 billion in the third quarter of 2026. Networking revenues increased 68%, while Compute & Storage revenues surged 242%, showing how strongly AI and data-center investment is flowing through Celestica’s portfolio.

Peers are also positioning around the same spending cycle. Jabil Inc. (JBL - Free Report) said fiscal 2026 growth was supported by AI infrastructure and has continued adding data-center capabilities. Flex Ltd. (FLEX - Free Report) is expanding its Cloud and Power Infrastructure portfolio, including power-conversion and modular data-center offerings for AI deployments.

CLS Must Convert Growth Into Durable Free Cash Flow

Cash provided by operating activities reached $389.7 million in the third quarter, up from $126.2 million a year earlier. Free cash flow also improved to about $128 million, but the expansion is absorbing substantial capital.

Inventory rose to $4.51 billion from $2.19 billion at year-end 2025, while third-quarter capital expenditures reached $274.1 million. Celestica lowered its 2026 free cash flow outlook to $460 million from $600 million, primarily because of targeted working-capital investments to support 2027 growth.

Celestica’s Customer Concentration Raises the Stakes

Celestica’s 10 largest customers accounted for approximately 79% of 2025 revenues. Three major customers in the Connectivity & Cloud Solutions segment represented 32%, 14% and 12% of total net sales, respectively.

That concentration matters more as Celestica expands capacity around projected AI demand. Changes in customer spending, deployment timing or sourcing decisions could affect factory utilization, revenue growth and profitability, making execution increasingly important as the company invests ahead of demand.

CLS Signals Favor Growth and Momentum Over Value

The balance currently tilts toward growth rather than pure value. Celestica’s earnings outlook, AI exposure and segment momentum support the case for continued expansion, but the sub-industry valuation premium and heavier investment needs reduce the margin for execution errors.

CLS currently carries a Zacks Rank #2 (Buy) and a VGM Score of A. Its Growth Score of A and Momentum Score of A align with favorable growth and earnings-revision characteristics, while the Value Score of C reflects a less-clear-cut valuation setup. Together, those signals support a constructive near-term view, though investors should weigh the stock’s growth profile against cash-flow demands and customer concentration. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Published in