Data center equipment suppliers Celestica and Fabrinet climbed to record highs Thursday after analysts gave bullish views on both contract manufacturers.
Goldman Sachs initiated coverage of Celestica with a buy rating and a 340 price target, implying a 19% advance from current quotes around 286.
The company is a winner among growing artificial intelligence data center buildouts due to its competitive advantage and ability to quickly and reliably scale production, analyst Michael Ng said in a note to clients.
"Despite Celestica's strong stock performance to date, we believe there is further room for stock price appreciation," the analyst added. He said the company benefits from growth among hyperscale and other cloud data centers, where the company has demonstrated its ability to win customer programs.
Goldman analysts expect Celestica's communications-segment revenue to grow from $3.9 billion last year to $14 billion in 2029 at a 29% five-year compounded annual growth rate.
"Celestica has over 25 years of experience producing and designing solutions within the networking industry, and is the third largest player in the overall Ethernet data center switching market," Ng said in the note. "We believe the company has differentiated itself from competitors through its switching solutions that it co-designs with its large customers and manufactures at scale..."
Meanwhile, JPMorgan raised its price target on Fabrinet to 430 from 345 and kept an overweight rating.
Analysts increased estimates for Fabrinet to reflect stronger demand trends in both the datacom and telecom end markets. Robust investments in data-center infrastructure support those markets, TheFly.com reported. JPMorgan sees a continued strong revenue and earnings growth for the company.
Data Center Stocks Lead Industry
Both Celestica and Fabrinet are leaders in IBD's contract manufacturing industry group. Toronto-based Celestica's 99 Composite Rating is the highest in the group, while Fabrinet is right behind with a 98 Composite score.
The industry group has been in the top 25 of 197 groups since June, thanks largely to demand for data center gear.
Celestica stock has tripled so far this year, and Fabrinet has nearly doubled. Singapore-based Flex is up 66% year to date. San Jose, Calif.-based Sanmina is up 78%, even after paring much of its 23% surge on Oct. 6. That's when Advanced Micro Devices struck a multibillion-dollar deal with OpenAI to build out data centers. Sanmina is a major AMD supplier.
TTM Technologies, which also supplies data centers, has climbed 140% this year. The Santa Ana, Calif.-based manufacturer is also seeing demand from defense and health care customers.
Celestica will report third-quarter earnings Oct. 27 after the market close. The next day, the company holds its annual investor and analyst day. Analysts' consensus earnings estimate is $1.48 a share in U.S. currency, for an increase of 42.4%. FactSet's consensus sales estimate is $3.029 billion, up 21.2% year over year.
Analysis Of Data Center Stocks
Celestica stock gapped up to an all-time high at the open Thursday, but pared gains. Shares have found support above the 10-week moving average after a mild pullback in September. Shares are extended, even from a price contraction in September through last week.
Celestica stock has a 21-day average true range (ATR) of 6.03%. The average true range, available on IBD MarketSurge, gauges the characteristic breadth of a stock's behavior. Stocks with a high ATR tend to make large price moves that can trigger sell rules. Stocks with lower ATRs tend to make more incremental moves.
With the S&P 500 and Nasdaq still in a power trend, investors can buy stocks with ATRs up to 8%, though they should not be too concentrated in such stocks.
Fabrinet shares gapped up 25.30, or 6.4%, to 423.65 in morning trading. The stock also found support above its 10-week line and cleared a brief price consolidation with a 397.26 alternative buy point. Shares are extended more than 5% from that level.
Fabrinet has an ATR of 4.22%.
The relative strength lines of both stocks are at new highs.
