Celestica Inc. (CLS) Sees Over 50% YoY Growth in Connectivity Revenues, Driven by AI Data Center Demand; Canaccord Boosts Price Target to $70 Following Strong Q2 Results
We recently compiled a list of the 35 AI Superstars According to Goldman Sachs.In this article, we are going to take a look at where Celestica Inc. (NYSE:CLS) stands against the other AI superstars according to Goldman Sachs.
US technology stocks have surged dramatically this year, largely driven by the growing excitement surrounding generative artificial intelligence (AI). However, according to research by investment firm Goldman Sachs, this rise is not indicative of a financial bubble like those of the past. The performance of these companies is expected to continue delivering solid returns to investors, fueled by the rise of AI superstars outside of the magnificent seven, among smaller tech firms and in non-tech sectors as well. However, Peter Oppenheimer, the bank's chief of global equity strategy and the head of macro research in Europe, has advised investors to diversify their portfolios to manage risk.
While tech stocks have been dominant, contributing 32% of global equity returns and 40% of US equity returns since 2010, these returns are underpinned by strong financial fundamentals rather than speculative bubbles. The earnings per share for the tech sector have increased by 400% since the peak before the 2008 financial crisis, far outpacing other sectors, which collectively saw only a 25% increase. A key driver behind the outsized returns in recent years has been a small group of hyperscale companies, particularly those in software and cloud computing. These companies have leveraged their vast resources and high profitability to dominate the market, with recent performance surging even further due to optimism around AI.
This has led to rising valuations, largely concentrated among a narrow group of market leaders. Peter Oppenheimer observes that this pattern mirrors historical trends in technological innovation. From the construction of canals in the 18th century to the adoption of the telephone, new technologies often attract vast capital and competition. Although this does not always result in financial bubbles, there is typically a period where prices decline as competition intensifies, ultimately leading to consolidation in the market. Over time, only a few large companies remain dominant, while growth shifts to secondary innovations that build on the original technology. The AI era is unique in that the dominant companies, which lead in AI, were also at the forefront of the previous tech wave — particularly in software and cloud services.
Their scale and profitability have positioned them well to absorb the high costs of AI investments. However, Oppenheimer notes that new competitors are emerging. The number of AI patents skyrocketed to over 60,000 in 2022, up from around 8,000 just four years earlier, suggesting that AI is following the typical pattern of large-scale capital growth and competition. Oppenheimer also points out that the companies pioneering a new technology are not always the ones that will create the most value from it in the long run. For instance, during the internet boom, telecom companies received significant investment, yet it was companies like those in social media and ride-sharing that capitalized on the internet infrastructure and achieved the greatest success. Similarly, as AI evolves, new companies could emerge as the next wave of tech superstars, reshaping industries beyond the current giants.
Let's now take a look at the list of 35 AI superstars that are on the major bank's radar. We compiled this list after consulting a report by the bank on the AI industry. These stocks are also popular among elite hedge funds and hedge fund sentiment is an important indicator that we pay a lot of attention to at Insider Monkey.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a circuit board with components depicting the intricate electronic componentry products the company produces.
Celestica Inc. (NYSE:CLS) offers a range of product manufacturing and related supply chain services. In the second quarter earnings call, Rob Mionis, the CEO of Celestica Inc. (NYSE:CLS), noted that there was strong demand for the Hardware Platform Solutions marketed by the firm, comprising storage, compute, and networking products. This healthy demand, likely to increase in the coming months as hyperscalers invest in AI data centers, had helped the firm post a more than 50% year-to-year increase in connectivity revenues in the second quarter.
Canaccord analyst Robert Young recently raised the price target on Celestica Inc. (NYSE:CLS) stock to $70 from $53 and kept a Buy rating, underlining that the firm had reported another strong quarter with Q2 results ahead of consensus on all metrics, a strong Q3 outlook, and fiscal 2024 guidance that was raised across the board.
Overall CLS ranks 34th on our list of the AI superstars according to Goldman Sachs. While we acknowledge the potential of CLS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CLS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
