A critical bottleneck in data centers is creating a massive runway for networking stocks like Celestica, according to Bernstein
Celestica manufactures custom AI hardware racks for major customers, including Google's tensor processing unit and OpenAI's Jalapeno chip.
Chipmakers are far from the only beneficiaries of the artificial-intelligence boom.
A growing bottleneck in data centers, which Bernstein analyst Daniel Zhu dubbed the "bandwidth wall," is leading to billions of dollars' worth of investment into high-speed networking and optical hardware.
In a Tuesday note, Zhu launched coverage of various networking stocks, crowning Celestica (CLS), a maker of the supply-chain electronics products, as his top pick. He issued an outperform rating and a $520 price target that implies room to rise nearly 50% from the stock's recent close.
Zhu noted that while the processing power of chips has gotten exponentially faster, network bandwidth speeds haven't kept pace. That's created a critical bottleneck in networking, "supporting higher specs and pricing," he said.
Celestica in particular serves as the primary hardware manufacturing, design and rack-assembly partner for three major AI projects: custom tensor processing units from Alphabet's (GOOGL) (GOOG) Google, OpenAI's custom "Jalapeno" chip architecture and AMD's (AMD) Helios switching program.
While Celestica shares have gained 17% so far this year, those returns look modest alongside those for networking peers like Lumentum Holdings (LITE), up 146%, and Coherent (COHR), up 46% over the same stretch.
But Zhu pointed to Celestica's upcoming analyst day on Oct. 27 as a "high-conviction near-term catalyst," predicting management could issue a 2027 forecast that catches many analysts off guard.
Wall Street is "materially underappreciating" upside from these partnerships, Zhu said. Together, Bernstein estimates these three customers represent an incremental revenue pipeline of roughly $25 billion for Celestica. Even after factoring in risks related to operational and manufacturing execution, Bernstein forecasts over $40 billion in revenue for Celestica in 2027, exceeding consensus expectations of $35.5 billion.
The broader networking space is full of opportunities. Celestica and Arista (ANET) are seizing market share from Nvidia (NVDA) as customers shift away from Nvidia's proprietary InfiniBand technology toward open Ethernet standards, Zhu said. He also initiated coverage of Arista's stock with an outperform rating.
"Increasing customer choice has caused Nvidia to become a share donor, and many of those customers have chosen Arista," Zhu said.
Other stocks that Zhu likes include Lumentum, Coherent and Ciena (CIEN). These optical-infrastructure companies are well-positioned as laser capacity is one of the most severe bottlenecks in data centers. However, Zhu prefers Lumentum over Coherent because Lumentum is an optical-communications pure-play company without exposure to non-AI industrial markets.
Zhu slapped market-perform ratings on shares of Cisco (CSCO) and Corning (GLW), saying that their stock prices fully reflect their opportunities and pointing out growth drags in non-AI end markets. However, in the case of an AI slowdown, he believes these names would have the least amount of downside.
-Christine Ji