Celestica stock fell more than 5% on Tuesday, reaching its lowest level since September 21 as AI-related companies broadly declined. Shares traded at $480 in Toronto, about 14.5% below their October peak. So, is this the start of a bear market or will it buy the dip as its earnings report nears?
Celestica stock drops as AI companies dive
Celestica shares remained under pressure as investors dumped companies in the artificial intelligence (AI) industry. Nvidia, the biggest company in the industry, dropped by 0.20% to $225, while AMD fell by 20 basis points. Other top AI companies like Broadcom, Marvell Technology, and Lumentum also retreated.
The weakness accelerated after Broadcom’s CEO suggested that many investors in the AI space were acting as casino gamblers. He also warned that Western companies were facing significant competitive pressure from Chinese firms.
Celestica is one of the biggest companies in the AI space. It operates in two segments, Connectivity & Cloud Solutions (CCS) and Advanced Technology Solutions (ATS). CCS, its biggest business, makes 800G networking switches and custom compute hardware for hyperscalers like Amazon, Meta, and Microsoft. Its ATS business builds solutions for other industries like aerospace and defense.
On the positive side, Celestica’s business has continued doing well, and analysts expect the trend will continue. The most recent results showed that its revenue growth accelerated in the second quarter. It made $4.70 billion in the second quarter, up by 62% from the same period last year.
Its revenue was higher than its previous guidance and what analysts were expecting. The management also raised its guidance again, and analysts expect the trend to continue in the foreseeable future. Management expects the third-quarter revenue to be between $5.25 billion and $5.5 billion.
For the year, the company expects that its revenue will jump to $20.5 billion, higher than the previous guidance of $19 billion. This surge will be much higher than the $12.3 billion that it made last year. Analysts expect its revenue to hit $35 billion next year.
Analysts are highly bullish on CLS stock despite valuation concerns
Most Wall Street analysts are highly bullish on the company. Bernstein’s Daniel Zhu initiated his coverage with an outperform rating and a target that is 42% above this level. Other top analysts, including from TD Bank, Royal Bank of Canada (RBC), UBS Group, and Scotiabank, have a highly bullish view of the company, citing its revenue and profitability growth.
A key concern is that the company is highly overvalued. It has a forward price-to-earnings ratio of 31, higher than the sector median of 22. This multiple is higher than its five-year average of 18, and much high than other fast-growing companies like Micron, Nvidia, and SanDisk.
Celestica shares technical analysis
CLS stock chart | Source: TradingView
The weekly chart shows that Celestica shares peaked at $655 in June and then pulled back to the current $488. A closer look shows that it has formed a head-and-shoulders pattern, a common bearish reversal pattern. It is in the right shoulder section of this pattern.
The stock is trading at the middle side of the Bollinger Bands indicator. At the same time, the Relative Strength Index (RSI) has formed a bearish divergence pattern. Therefore, the stock will likely have a bearish breakout, potentially to the key support level of $400. A drop below that price will point to more downside towards $300.
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