Celestica Inc. (CLS-N, CLS-T; Buy)
Pie is getting bigger. Celestica's CFO, Mandeep Chawla, believes recent conversations with customers confirm order strength through 2025, with final forecasts consistent if not incrementally stronger than 30-60 days ago. Qualitatively, management is also seeing acceleration in discussions for new programs across both existing and new customers. The company is already in discussions with its largest customer regarding programs beginning in Q1/26, from two new server wins and an industry first 1600G networking win. Given the fact that silicon for these programs is not even ready yet is a testament to Celestica's strong and collaborative relationships with both customers and suppliers, supported by its ~950 in-house engineers. Quality and ability to deliver are key standouts, allowing the company to win and maintain wallet share.
Tariffs and Trump. While tariffs are disruptive to customers, Celestica's global manufacturing footprint allows the company to shift production to new sites to minimize total cost of ownership. In Trump's first presidential term, customers evaluated the cost to either move or pay the tariff and often saw existing programs to end of life, while next-generation programs were moved. Mr. Chawla believes net demand benefit is expected in the U.S. and Southeast Asia, while the ~$1bln of revenue manufactured in Mexico may be impacted. Celestica's status as a North American provider is also believed to be a differentiator over Chinese-based peers.
Well positioned for back-end Ethernet. Consistent with our thesis, Mr. Chawla discussed how customers are asking for Ethernet solutions for back-end networking over InfiniBand, with the majority of deployments for Celestica's switches today being used in the back-end. We continue to believe Celestica is very well positioned as a leading provider of high-speed 400G and 800G switches, currently holding ~35% share for 400G port volumes and expected to maintain or grow that share for 800G. When asked about OEM vs ODM deployments, Mr. Chawla believes hyperscalers prefer to customize software, with the ODM's flexibility and better pricing terms making a difference considering the massive scale of aggregate dollars being deployed in data centers today. Beyond hyperscalers, there are also an emerging group of specialty customers, like Uber, Wal-Mart, and JP Morgan, that want to keep data on-prem but require stronger networking capabilities to handle AI workloads, driving demand for Celestica's 400G switches. While this group of customers provides some diversification benefits, management expects limited revenue contribution, potentially reaching "few hundred million" in revenue in a few years.
New hyperscaler server discussions making good progress. Regarding the air pocket in server revenue with the largest customer, Mr. Chawla discussed how advancements in silicon have compressed server program lifecycles from 2-4 years historically to now 4- 5 quarters, suggesting there might be recurring air pocket cyclicality going forward. Despite this, the company remains in good conversations with other hyperscalers and are confident that they will have other hyperscaler compute wins in 2025. These programs are likely to start as second source, with the goal of becoming sole sourced over time. Celestica's ODM-based server, built with AMD's MI325 silicon, is likely to begin contributing to revenue in 2026.
What's next? Acknowledging an accelerated pace of hardware investment is unlikely to continue indefinitely, Mr. Chawla believes demand is likely to slow, not end, given a large installed base and refresh cycle that will likely sustain demand in the medium term. Management is being mindful not to overbuild capacity, keeping utilization high, while continuing to diversify with growth in ATS, either organically or inorganically.