Celestica (NYSE:CLS) The AI Infrastructure Winner No One Wanted This Quarter

A 53% revenue surge and a record 8% margin — so why did the stock fall 14%?

Celestica Inc. (NYSE:CLS) became one of the earnings season casualties, with the stock falling 14% despite delivering a strong quarter. Revenue increased 53% year-on-year to US$4.05 billion, adjusted operating margin hit 8.0%, a new company milestone, and adjusted EPS of US$2.16 came in above the high end of guidance.

The issue was not the quarter. It was the market’s changing appetite for the AI trade. Momentum has started to cool, and stocks that had already priced in a lot of future growth are now being judged more harshly. When sentiment shifts in a sector, even strong results can become the excuse to take profit rather than add exposure.

We have been investors in Celestica over the past year, with our first position taken at around US$90 per share. We recently sold our position because the risk-reward had shifted. The stock looked stretched, and the business was carrying meaningful concentration risk, with hyperscaler demand and the CCS segment doing most of the heavy lifting. That does not mean the growth story is over. It means the margin for error has narrowed considerably.

The Factory Floor Behind the AI Revolution

Celestica manufactures critical hardware across multiple industries, but AI infrastructure has become the real growth engine. Even if you have never heard of Celestica, you have probably come across the type of products it helps build if you have followed the data centre story.

Storage systems, rack integrations, routers, networking switches, 800G and 1.6T switches, and other key components of the modern data centre all sit inside Celestica’s world. When hyperscalers like Microsoft, Google, or Amazon need custom AI server racks at scale, they usually do not build them in-house. They hand the design specifications to companies like Celestica, which then engineer, manufacture, test, and ship the finished hardware.

That makes Celestica a picks-and-shovels play on the AI data centre buildout. The company does not need to bet on which AI model wins or which hyperscaler grows fastest. It simply needs the infrastructure investment cycle to continue, and every major signal suggests it will.

US$4 Billion in a Quarter and the Revenue Step-Change Is Still Accelerating

The scale of Celestica’s growth over the past twelve months is worth pausing on. When CCS revenue reached almost US$2.5 billion in Q3 2025, that felt like a step-change. Total revenue is now sitting at US$4.05 billion, meaning the business has added roughly US$1.4 billion of quarterly revenue in just twelve months.

The Connectivity and Cloud segment was the clear driver. Revenue came in at US$3.2 billion, up 76%, while Enterprise AI/ML more than doubled to US$830 million. Advanced Technology Solutions was more subdued, with revenue broadly flat at US$806 million. That looks deliberate. Management has been optimising the Aerospace and Defence portfolio, so ATS is better viewed as the margin-stability anchor rather than the primary growth engine.

Management also raised its full-year 2026 outlook meaningfully. Revenue guidance was upgraded by US$2 billion to US$19 billion, and adjusted EPS guidance lifted to US$10.15. Those are significant upward revisions, and they came alongside commentary about new program wins in advanced networking and improved forecast visibility from customers.

Why the 8% Margin Milestone Matters More Than It Looks

Celestica posted its highest ever adjusted operating margin result this quarter at 8.0%, up from 7.1% in the prior corresponding period. The improvement is directly tied to the growing weight of CCS in the revenue mix. CCS now accounts for around 80% of total revenue, up from 70% last year, and the segment carries structurally higher margins than ATS.

Within CCS, the high-value HPS networking business carries the richest margin profile. As 800G and 1.6T switch programs scale, the revenue concentration in this part of the portfolio will continue to support margin expansion rather than dilute it. That is an important structural tailwind for the earnings profile.

Celestica’s manufacturing model also benefits from operating leverage in a straightforward way. Factories, tooling, systems, and test equipment are largely fixed costs. Strong revenue growth does not require an equal step-up in that cost base, which means each incremental dollar of revenue falls through at higher margins. Return on invested capital reached 49%, which tells us the business is generating substantial excess value above its own cost of capital.

Why We Sold and What Investors Should Watch From Here

The quarter was strong, and demand is clearly still heating up. But the reason we became more cautious was not the current result. It was the near-term risks that could start to weaken the thesis.

Celestica still relies on a concentrated group of hyperscaler customers. If major contracts are deferred, delayed, or repriced, the impact on earnings could be material. Capex has also moved above US$200 million, which is starting to weigh on free cash flow, even though underlying cash generation remains solid. After a strong run and a meaningful profit on our position, reducing exposure felt like the right risk management decision.

The concentration risk is the one to keep watching closely. As management raises guidance and new program wins come through, the question is whether the customer base is diversifying or whether Celestica is adding scale within the same concentrated set of hyperscalers. If the answer is the latter, the earnings sensitivity to any demand revision from a single customer remains high, even as the headline numbers continue to impress.

The Investors’ Takeaway for Celestica

Celestica delivered one of the stronger earnings prints of Q1 2026 reporting season. Revenue growth of 53%, a record margin, a raised full-year outlook, and strong adjusted EPS all point to a business executing well on a structural opportunity that is still early in its development arc.

The 14% share price fall on the day of results is a function of the AI trade rotation, not a fundamental problem with the business. Investors who sold on that day were repricing for a risk environment where concentration, capex intensity, and stretched valuations matter more than they did twelve months ago.

From here, the milestones to track are the pace of customer diversification within CCS, progress on 1.6T switch ramp timelines, and whether adjusted operating margins can sustain above 8% through the rest of the year. If Celestica can hold margins while its revenue base continues to scale, the stock will find a floor and the growth narrative will reassert itself. The risk is that customer concentration leads to earnings volatility if any hyperscaler pull-forward demand normalises. More coverage of global technology and AI infrastructure names is available at stocksdownunder.