Fabrinet is a key player in the optical supply chain, providing advanced and high-precision optical manufacturing services as a contract manufacturer to OEMs, hyperscalers and Nvidia. The company has multiple growth outlets ahead, including its HPC platform ramp with Amazon, the ‘big growth’ with Nvidia on 1.6T and 800G transceivers, along with new product ramps with Ciena and Cisco, its second largest customer behind Nvidia. 

There are a handful of puts and takes to Fabrinet’s story, primarily that its positioning as a contract manufacturer lends to thin margins with limited ability to expand in that regard. Growth in key outlets such as transceivers remains supply constrained and showing minimal sequential growth, though with the expectation that those soon ease. Q3 was also guided to see low single-digit QoQ growth, likely weighed down once again by transceiver constraints on the EML side. 

Looking further ahead, strong demand in 800G and 1.6T transceivers as well as within DCI provide a solid backdrop for continued growth, and the expansion of its HPC program with Amazon or with hyperscalers could represent substantial new revenue streams. Fabrinet also leads in CPO with early revenue now appearing, with the company expected to serve as the primary CPO module manufacturer for Nvidia, while other optical solutions like optical circuit switching could soon layer in. 

Capacity will also not be a problem in future growth, with Fabrinet’s new Building 10 and Pinehurst expansion in Thailand unlocking more than $2.6 billion in revenue potential, or nearly 50% higher than next year’s estimated revenue.  

Brief Product Overview 

Fabrinet provides advanced optical packaging, high-precision optical and electro-optical manufacturing services to OEMs; as management put it: “We're a pure contract manufacturer. We don't have any of our own products. And that's actually a positive for many of our customers. They don't want us to have our own products.” This neutral model with no proprietary products means Fabrinet does not compete with its customers, regardless of where they are positioned in the optical stack. 

Fabrinet also serves as a key optical partner for Nvidia (who generated 27.6% of its FY25 revenue, or ~$944 million), with some of its main contributions said to be for short-reach active optical cables and 800G transceivers for Nvidia’s InfiniBand platforms, as well as optical engine packaging. Fabrinet was also stated as key partner for Nvidia’s upcoming silicon photonics CPO switch platforms during GTC 2025.   

Fabrinet’s manufacturing primarily spans three main component lines: optical communications devices, industrial lasers, and sensors.  

Fabrinet’s optical communication (OC) services include selective switching products such as reconfigurable optical add-drop multiplexers (ROADMs), optical amplifies and modulators for fiber optics. OC also includes transceivers and tunable lasers, active optical cables for high-speed data center interconnect (DCI), and InfiniBand, Ethernet, fiber channel and optical backplane connectivity.  

OC is the core focus of this analysis as we delve deeper into the optics supply chain, as the shift to Nvidia’s Rubin generation and push to bring optics closer to the networking switch are expected to see silicon photonics silicon photonics capture incremental value, even though copper remains relevant and intact at the shortest distances.   

OC is also the core revenue driver for Fabrinet, generating nearly three-quarters of revenue; sensors for automotive is the second-largest product line at roughly 10% of revenue, while industrial lasers are a much smaller contributor at ~4%. 

HPC Segment Ramping for AWS 

Fabrinet’s new ‘HPC’ segment relates to its manufacturing of high-complexity electronic assemblies for hyperscale AI accelerator platforms, and though it is only in its second quarter post-introduction, there are clues showing that HPC could be quite lucrative for long-term growth. Though HPC is currently limited to one customer, AWS, the program is expected to scale to more than $600 million annually, or north of 10% of annual revenue, implying future HPC program wins or expansion can easily and quickly add substantial growth to the top-line.  

Fiscal Q2 marked the second quarter of Fabrinet ramping its HPC program for AWS, which is understood to be for high-complexity printed circuit board assembly (PCBA) likely for Trainium3, with management hinting at a goal of expanding into optical interconnects and other products in the future. Fabrinet also issued warrants allowing Amazon to purchase up to 381,922 shares at $208.48 vesting on certain purchase requirements, though it did not state the duration or scope of the agreement with Amazon.  

Although the program is only in its second quarter of ramping, growth was very strong in Q2, up 455.8% QoQ to $85.6 million. Fabrinet remains confident that the program will continue to experience rapid growth and will be fully ramped over the next two quarters. Management clarified that the program is a “little bit more than halfway” ramped and has a second production line qualified, and we're in the process of qualifying additional lines.” Once these lines ramp, Fabrinet stated that it will be on its way to achieve its full run rate of above $150 million per quarter, to be achieved over the next couple of quarters. 

While management guided for strong sequential growth in the near term as the second and third lines get qualified, they also cautioned not to take Q2’s sequential growth and extrapolate forward linearly: 

“HPC growth, it's not in a straight line because we are dealing with some new products that don't always grow. The growth is a little bit lumpy, I would say. So HPC won't necessarily grow in a straight line. It looks like a nice straight line. But really, we only have 2 data points, 2 quarters of revenue.  

So HPC, we had a nice bump of about $70 million sequentially last quarter. So that's not going to grow in that space. But we do anticipate double-digit growth in that area.” 

Assuming Fabrinet still reaches the full run rate within two quarters but sees a softer Q3, say to the $100 million revenue region (or high-teens QoQ), this would imply a sharper ~50% QoQ increase in Q4. At the full run rate, the program will be a key growth driver, with the roughly $600 million annual run rate representing ~13% of FY26’s estimated revenue and ~11% of FY27’s estimated revenue.  

This is especially important when taking into account all of the facts around the Amazon deal – Fabrinet is not the sole supplier or even the primary, but rather the secondary supplier, with future growth opportunities hinging on its ability to execute and deliver excellent quality and delivery at ‘competitive costs’ (ie, not guaranteed). 

If this first deal is any indication of what initial engagements with new customers could look like, HPC could shape up to be a much larger contributor down the road. However, the main downside is that Fabrinet has said engagement timelines for HPC are long, meaning it may be multiple quarters before new growth arises. 

Transceivers Remain Supply Constrained, but EMLs Easing 

Optical component supply constraints have been impacting Fabrinet’s datacom revenue, which has been essentially flat for the last three quarters, after having peaked at nearly $330 million in Q1 FY25. Revenue in FQ2 was up just 2% QoQ but down (7%) YoY to $278.1 million, primarily due to these shortages, as management noted that demand is very robust and that they are shipping everything they can, including significant volumes to its main customer, understood to be Nvidia.  

Easing shortages should open the doorway for Datacom revenue to begin accelerating through 2026, considering the signals that we are seeing across the optics supply chain pointing to strong demand for 800G and 1.6T transceivers. Fabrinet also sees that as the case, explaining that the “the big growth with NVIDIA is really in front of us on 1.6T and 800G,” meaning quickly resolving EML constraints are a key factor in its ability to reaccelerate Datacom revenue growth. 

Fabrinet had revealed last quarter that they believed they would face another quarter to two of tight supply before constraints start to ease, and commentary this quarter suggests they might soon be seeing the end of the tunnel. Notably, Fabrinet explicitly called out EMLs as the main cause of supply constraints and implied that Nvidia qualified a second supplier during the quarter, meaning its main constraint will likely ease over the coming quarters.  

There was another interesting tidbit from the call that is worth some attention – management explained that they are indifferent to product mix, whether it favors 800G over 1.6T or vice versa. This is important because as a contract manufacturer, Fabrinet benefits from volume, not ASPs, meaning that it will benefit from increasing volume as either 800G or 1.6T are selected. Fabrinet’s growth will remain largely insulated from nuances within the upgrade cycle, such as if some customers take a slower ramp on 1.6T, whereas transceiver suppliers are hammering on 1.6T for revenue and margin uplifts, where a slower ramp will more acutely impact growth.  

Fabrinet also mentioned some future transceiver opportunities, such as building transceivers for merchant vendors and producing directly for hyperscalers, noting that these opportunities would be “quarters away rather than years away” in terms of becoming a meaningful revenue stream. 

DCI to See Faster Growth in Q3  

DCI revenue (now provided as a separate breakout within Telecom) has been steadily increasing over the prior two years, having scaled from a ~$70 million quarterly run rate to $100 million in mid to late fiscal 2025, and now moving higher to the $140 million range.  

Growth was moderate in Q2 at 42% YoY and 2% QoQ with DCI module revenue up 59% YoY, slowing from the 92% YoY and 29% QoQ growth in Q1 as this quarter faced a tougher comp. Although Q3 guidance was somewhat vague, management stated that they expect DCI to “grow faster than we have seen in the past quarters.” Regardless of whether this faster growth comment is applied to YoY or QoQ, or a return to either >90% YoY or >30% QoQ, it could imply DCI revenue approaching around $190 million next quarter. This is likely to be driven by EML capacity coming online, or strong demand for 400ZR products as the 800ZR ramp approaches.   

Looking ahead, management expects demand to be durable as the ramp of 800ZR products approaches, similar to how Ciena noted that 800ZR is ramping later this year; however, management cautioned that growth will not always be in a straight line as challenges may arise from time to time with leading-edge products.  

For a quick note on Ciena, Fabrinet clarified that they started to ramp Ciena’s new system program in Q2, and this was a key driver of Telecom’s strong growth of nearly $81 million of 17% QoQ: “Telecom revenue growth was particularly strong as we started to ramp Ciena's new system program, as well as other new program wins that we're particularly excited about.”  

While Fabrinet did not clarify if Ciena was included in the DCI breakout, Rosenblatt’s Michael Genovese commented that “if you counted that Ciena business where that stuff was going in DCI, you'd find the vast majority of your telecom growth was driven by DCI and then you had a huge sequential DCI quarter. But that's just like kind of a segmenting thing. Any thoughts on that?” 

Seamus Grady, CEO 

“Yes, I think that's pretty accurate. DCI has been very, very strong for us. The growth is not just DCI, but it's predominantly DCI. It's been very good, and it continues to grow and the demand looks to be very, very durable, and it's not just Ciena, it's across multiple customers.” 

Fabrinet Already Seeing CPO Revenue, Multiple Customers Engaged 

Fabrinet was quite bullish on the upcoming opportunities around CPO, with management essentially revealing that they are the leader in CPO, far ahead of competitors and already shipping small amounts. Additionally, Fabrinet is working on separate CPO programs with three different customers, not only Nvidia, though analysts from Rosenblatt believe Fabrinet is well positioned to benefit as “Nvidia's primary transceiver and co-packaged optics module manufacturer.” 

Fabrinet CEO Seamus Grady explained that Fabrinet is “already seeing some CPO revenue, although the amounts are relatively small right now. We're working on co-packaged optics programs with 3 different customers. It's not just 1 customer, Samik, it's actually 3 different customers. And the specific timings on when the revenue would become more material, depends on our customers' road maps and schedules, but we're very excited about CPO. Again, we don't really want to speak on our customers' behalf, but rest assured, we're quite excited and we have several products that we're working on our projects with our customers.”  

For brief clarification on the revenue timing part, Fabrinet will see revenue impacts in line with, or slightly ahead of customer production timelines, meaning that Nvidia’s move for initial production of its Spectrum-X Ethernet switches supporting CPO in late 2026 may be appearing now through the next two quarters, while strong growth is likely to appear in 2027 as CPO volume ramps. Other industry commentary around CPO, such as from Lumentum, points to CPO seeing stronger contributions in 2027 with scale-out shipments beginning, implying CPO could see a strong ramp for Fabrinet into year end and next year from its positioning a few quarters.    

For OCS, details were a bit limited, though Grady noted that Fabrinet is engaged on multiple fronts and reemphasized that growth would depend on customer ramp schedules. Again, Lumentum recently pointed to larger contributions for them from OCS this year, raising revenue forecasts from $100 million to $400 million, implying this could also quickly turn into a key revenue stream for Fabrinet later this year.   

Capacity Expansion Underway, “Building 10” Fully Ready by 2027 and Adding $2.5B in Revenue Potential 

Fabrinet is accelerating its capacity expansion plans, pulling ahead the first portion of its Building 10 in Chonburi, Thailand by six to eight months, while expanding at its Pinehurst facility in Pathum Thani, Thailand to help meet strong demand. Combined, the two facilities add substantial revenue generation capacity of >$2.65 billion annually. Fabrinet also sees very minimal margin headwinds even in the event of a slower ramp stemming from its capex-lean construction abilities.  

Management provided some color on the completion timelines for the new building, with the first 250K square foot portion expected to be ready by June, six to eight months ahead of schedule, and the full factory ready by early 2027.  

Fabrinet revealed at Barclays’ Global Tech Conference in December that Building 10 can add $2.5 billion in revenue at full scale, with estimated capex of around $130 million for the building — simply put, Building 10 has the ability to generate nearly 20X of capex as revenue at full scale. Additionally, Fabrinet sees minimal headwinds from the factory if the ramp is slower than expected, at just 0.15 points to gross margin if it sits completely idle.  

With management also adding in Q2’s call that Pinehurst can support $150 million revenue, dependent on mix, both buildings add $2.65 billion in annual revenue potential. Compared to Fabrinet’s current footprint having room to support up to $4.8 billion in revenue (slightly above its current $4.5 billion run rate), the two buildings offer >50% upside in revenue capacity, implying that Fabrinet could support approximately $7.3 billion once is finished, or multiple years of runway. Additionally, the extensive capacity in Thailand serves as a key-value add to customers, as Fabrinet benefits from lower labor costs, thus giving them an ability pass margins on to key customers such as Nvidia and AWS. 

Financials  

FQ2 Revenue Grew by 36%  

Fabrinet’s Q2 FY2026 revenue ending December grew by 35.9% YoY and 15.8% QoQ  to a record $1.13 billion, beating estimates by 5.2%. Revenue growth accelerated by 14.3 percentage points from 21.6% YoY and 7.5% QoQ growth in the previous quarter. It was the fastest YoY growth since the company’s public listing in 2010 and was primarily driven by the strong growth in the Telecom and High-Performance Computing (HPC) revenue.   

Management has guided FQ3 revenue in the range of $1.15 billion to $1.20 billion, implying a YoY growth of 34.8% and 3.7% QoQ. For some detail on where growth is coming from, management explained that “within telecom, we anticipate that DCI is going to grow faster than we have seen in the past quarters. So that strength continues into our third quarter, and we also anticipate datacom to growth. So that's the color that we can provide at this stage. And automotive will probably be down in a similar way as it has been in the prior quarter.” 

Analysts expect strong growth to continue and FQ4 revenue is expected to grow by 36.9% YoY to $1.24 billion. 

The company’s FY2026 revenue ending June is expected to grow by 32.7% YoY to $4.54 billion and will then moderate to 18% YoY growth to $5.35 billion for FY2027 and 14.5% YoY to $6.13 billion for FY2028.  

Revenue by Product Category  

Optical Communications Revenue Grew by 29%  

Fabrinet’s FQ2 Optical Communications revenue grew by 29% YoY and 11% QoQ to $832.6 million. Revenue growth accelerated by 10 percentage points from 19% YoY and 8% QoQ growth in the previous quarter. 

Within optical communications, telecom FQ2 revenue grew by 59% YoY and 17% QoQ to a record $554.4 million. The telecom revenue was up 59% YoY and 15% QoQ in the previous quarter. The strong telecom revenue growth was primarily due to early ramp of Ciena’s systems program and other new program wins. Management expects telecom revenue to grow sequentially in the next quarter.  

Within telecom, Data Center Interconnect (DCI) revenue grew by 42% YoY and 3% QoQ to $142.2 million. Revenue growth decelerated from 92% YoY and 29% QoQ growth in the previous quarter.  

Datacom FQ2 revenue was down (7%) YoY and up 2% QoQ to $278.1 million compared to a decline of (17%) YoY and (1%) QoQ in the previous quarter. Management expects sequential revenue growth in the next quarter, while Q2 growth was impacted due to component shortages.  

Non-Optical Communications Revenue Grew by 61%  

Fabrinet’s FQ2 Non-Optical Communications revenue grew by 61% YoY and 30% QoQ to $300.3 million. Revenue growth accelerated by 31 percentage points from 30% YoY and 5% QoQ growth in the previous quarter. 

The strong growth was primarily driven by high-performance computing (HPC) products. HPC revenue in FQ2 came at $85.6 million and was up 456% QoQ from $15.4 million in the previous quarter. FQ1 was the first quarter in which the company broke out this category. 

FQ2 automotive revenue grew by 12% YoY and down (4%) QoQ to $117 million. Management expects another modest sequential decline in automotive revenue in the next quarter.  

Industrial Laser FQ2 revenue grew by 10% YoY and 4% QoQ to $41.4 million compared to 12% YoY and flat QoQ in the previous quarter.  

The other revenue grew by 26% YoY to $56.4 million compared to 36% YoY in the previous quarter.  

Margins  

The company’s gross margins and operating margins improved in FQ2 despite the foreign exchange headwinds.  

• FQ2 gross profits grew by 36.5% YoY to $137.68 million. Gross profit margin showed an improvement of 10 basis points YoY and 30 basis points QoQ to 12.2% despite the foreign exchange headwinds. Adjusted gross profit margin was flat YoY and up 10 basis points QoQ to 12.4%.  
• FQ2 operating income grew by 43.7% YoY to $114.4 million. Operating margin improved 60 basis points YoY and 50 basis points QoQ to 10.1% primarily driven by operating leverage. Adjusted operating margin improved by 30 basis points YoY and QoQ to 10.9%.  
• FQ2 net income was $112.6 million or 9.9% of revenue compared to $86.6 million or 10.4% of revenue in the same period last year. The company reported a foreign exchange loss of $3.2 million compared to a gain of $4.0 million in the same period last year. Adjusted net income was $121.6 million or 10.7% of revenue compared to $95.1 million or 11.4% of revenue in the same period last year. 

FQ2 Adjusted EPS Grew by 29%  

The company’s FQ2 GAAP EPS grew by 30.7% YoY to $3.11, beating estimates by 3.7%. The adjusted EPS grew by 28.7% YoY to $3.36, beating estimates by 3.4%.  

Analysts expect strong growth to continue and expect adjusted EPS to grow by 40.7% YoY to $3.55 for FQ3 and 41.8% YoY to $3.76 for FQ4. The company’s FY2026 ending June adjusted EPS is expected to grow 33.5% YoY to $13.58 and FY2027 adjusted EPS is expected to grow 20% YoY to $16.29. 

Cash Flow and Balance Sheet  

The company’s cash flows have been weak in FQ2 due to higher working capital and increase in capex.  

• FQ2 operating cash flow was $46.26 million or 4.1% of revenue compared to $115.9 million or 13.9% of revenue in the same period last year. It was lower due to higher working capital.  
• FQ2 free cash outflow was ($5.3 million) or (0.5%) of revenue compared to $94 million or 11.3% of revenue in the same period last year. It was down due to lower operating cash flows and the increase in capex. The capex increased by 135.7% YoY to $51.6 million due to the expansion of capacity to support the future growth.   
• Cash and short-term investments were $960.8 million and no debt at the end of the December quarter compared to $968.8 million and no debt at the end of the previous quarter.   
• Inventories grew by 63.3% YoY and 10.6% QoQ to $798.9 million to support the future growth.   

Conclusion 

Fabrinet sees multiple different outlets to growth from 800G and 1.6T transceivers with Nvidia, the continued ramp at Amazon, the upcoming ramp of 800ZR modules for data center interconnect and new platforms with Ciena and Cisco. Fabrinet is also leading in CPO and shipping small amounts now, with analysts expecting the company to be a key beneficiary as Nvidia’s main CPO module manufacturer, with two other customers engaged as well.  

Revenue growth is expected to remain around 35% to 37% in fiscal Q3 and Q4, before decelerating to the low 30% range in early 2027. The company’s new Building 10 will unlock significant revenue generation potential and open the door for growth to remain strong, as long as demand does. However, as a pure-play contract manufacturer with no original products, Fabrinet fundamentally sees thinner margins and soft cash flows, with little power to materially increase either of those two fundamental aspects. Despite this, the bottom line remains rather defensible with earnings expected to grow nearly 34% to $13.58 this year.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

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As we have discussed for our Discovery and Pro members, AI networking is one of the strongest trends for this year and next, driven by scale-up and scale-out networking to support larger GPU racks and accelerating GPU cluster sizes. Celestica is an under-the-radar beneficiary of this trend, capitalizing on strong demand for 800G and 1.6T Ethernet networking switches and leveraging its deep ties to hyperscalers.  

Celestica guided for one of the most impressive accelerations seen in this last quarter of earnings, underpinned by its 800G switches accelerating next year with 1.6T on deck. For 2026, Celestica expects revenue growth to accelerate around five points to 31% YoY in 2026, whereas consensus had been pegged at just 17% YoY. This strong upside is being driven by networking and custom AI compute platforms with visibility into 2026-2027. 

In terms of AI revenue, Celestica’s Cloud and Connectivity Solutions (CCS) segment is guided to generate $9 billion in revenue in 2025, up ~40% YoY, accounting for nearly 74% of total revenue. CCS, which includes AI networking, server, storage and rack-scale system solutions, is Celestica’s main growth driver, expected to grow ~40% annually in 2026 and 2027. 

Celestica is closely linked to Broadcom’s networking platforms as a key vendor, serving major customers such as Google and Meta, with some of its notable product engagements including Google’s TPU server racks, and Meta’s Minerva ASICs servers, Wedge400 switches and also its next-gen Tomahawk5-based 400G AI fabric switch Minipack3. Additionally, management’s commentary suggests that OpenAI could become a key customer as soon as 2027. 

Below, we cover Celestica’s strategic positioning in the high-bandwidth Ethernet market, its engagements with hyperscalers and upcoming platform ramps, its updated growth outlook for FY26 and beyond, and more.  

Celestica’s Strategic Positioning in Custom Networking Switches 

Celestica is strategically positioned in the AI supply chain as it provides hyperscalers with highly customized data center networking switches, servers and storage platforms, alongside custom rack-scale integration services.  

Celestica is also closely aligned with Broadcom, as a preferred provider offering customized high-performance Ethernet switches based on its Tomahawk platform and integrated XPU-based racks and systems. CEO Rob Mionis explained that when Broadcom launches new silicon, such as its newest Tomahawk6, “they’ll work with us to develop products, and those products end up in the major hyperscalers.”  

Growth opportunities are primarily centered around its high-bandwidth Ethernet switch portfolio focused on back-end networking, with the company being the leading supplier with 41% share of the >200G switch market through Q2, and with 55% share of the custom switch market (up from 40% in 2024).  The back-end networking positioning is important for Celestica as it means the company is exposed to the faster-growing segment of Ethernet switching – the back-end TAM is forecast to grow at a 56% CAGR through 2029 on scale-out, and potentially soon, scale-up demand, whereas front-end (user-facing) is forecast to grow at a 20% CAGR.  

Per management, the back-end also sees a much faster refresh rate of every 18-24 months versus >5 years for front-end deployments, and it adopts the newest and fastest bandwidths (800G and soon 1.6T) due to the greater performance and reliability requirements of GPU-to-GPU and rack-to-rack communications.  

Celestica’s primary products include scalable top-of-rack switches and high-bandwidth Ethernet switches (>400G). Its 100G and 400G switches are optimized for data center leaf-and-spine deployments.  

For 800G switches, Celestica’s DS4100/DS4101 are based on Broadcom’s Tomahawk4 portfolio and the DS5000 is based on the Tomahawk5, targeting high bandwidth data center leaf-spine, and top-of-rack applications. For additional clarity on 800G switch dynamics, management explained that they have seen “tremendous growth in 800G this year to the point where we'll end 2025 with roughly a 50% split between 800G and 400G in terms of the products that we're delivering. As we look into 2026, we're seeing the 800G demand, in particular, accelerating.” 

For 1.6T, Celestica will offer the DS6000 and DS6001, based on Broadcom’s upcoming Tomahawk6 offering 102.4Tbps bandwidth, with availability later in 2026. The DS6000 comes in an air-cooled version with linear pluggable optics (LPO) to improve power efficiency, while the DS6001 features hybrid-cooling and the first to integrate direct-to-chip liquid cooling.  Both 1.6T switches are optimized for AI back-end networking (scale-out and scale-up), as well as large-scale AI fabrics for AI training and inference for frontier model sizes. Management expects the 1.6T upgrade cycle to emerge in late 2026 but primarily land in 2027, with one customer giving visibility to a back-half 2026 ramp and multiple other ramps occurring through 2027. 

Celestica is also already making early investments for 400G SerDes to support 3.2T switch platforms, though it does not expect 3.2T mass production to arrive until 2028. Management is also preparing for co-packaged optics (CPO) and other interconnect types such as co-packaged copper (CPC), and while it sees some potential CPO shipments with 1.6T, it does not expect CPO to emerge in full-force until the 3.2T cycle.  

Although these switch products can be highly customized, they support open-source networking stacks such as SONiC, offering hyperscalers flexibility in deployments, facilitating integration into existing software and hardware ecosystems, and letting customers avoid vendor lock-in. This is furthered with Celestica’s extensive Circular Services offering, spanning hardware lifecycle management, remanufacturing, and refurbishment to extend hardware lifetimes and reduce TCO.  

ODM Pivot Driving Hyperscaler Growth, with Google and Meta Key Customers (and Soon Likely OpenAI) 

This positioning in custom Ethernet switches also pushes Celestica towards more of an ODM (original design manufacturer) model from a traditional EMS contract manufacturer, as it engages more deeply across the design and engineering phase, tailoring products exactly to its hyperscaler customers’ needs. Some of its notable confirmed/implied hyperscaler product engagements include Google’s TPU server racks, and Meta’s Minerva ASICs servers, Wedge400 switches and also its next-gen Tomahawk5-based 400G AI fabric switch Minipack3. 

Here is an example of what Celestica’s involvement would look like, such as on Meta’s Wedge400, its top-of-rack networking switch based on Broadcom’s Tomahawk3 from 2021:  

• Celestica works with Meta on system requirements and finalizes system level architecture.   
• Celestica is fully responsible for hardware design and complete prototyping, along with functional and reliability tests and diagnostic software development. 
• After this, Meta reviews Celestica’s engineering design and test reports and moves to production. 

Management’s discussion on its first-of-kind rack-scale liquid cooled 1.6T networking win with a hyperscaler (likely to be Meta for its upcoming Santa Barbara racks) also shed light on why Celestica continues to win these engagements: 

“The customer required an accelerated road map to allow the solution to be early to market, leveraging Broadcom's Tomahawk 6 SC silicon, making speed to market a key consideration. In addition, the customer required multi-node manufacturing capabilities in Asia and the U.S. to support the delivery of the program. As with many of our key engagements, managing complexity was a defining factor. 

Celestica was awarded the program earlier this year based on a strong working relationship with the customer and their confidence in our industry-leading design engineering. They also valued our advanced manufacturing capabilities, specifically our ability to operationalize highly complex production lines for liquid cooled racks at scale and to do this faster and more seamlessly than other potential partners. 

After receiving initial Tomahawk 6 samples earlier this year, we quickly stood up an operational prototype for the 1.6T switch and believe we were the first team anywhere to have done so. The program is scheduled to begin mass production next year.” 

This ODM pivot and ability to co-design and manufacture highly customized, next-gen networking switch and rack solutions at speed is quite visible in Celestica’s hyperscaler growth trajectory, as hyperscalers are expected to account for ~$6.93 billion of revenue in 2025, up from $2.19 billion in 2022, an incredible ~47% CAGR. However, the ODM positioning also presents a risk as even a shift to higher complexity, higher value products may be unable to produce continuous margin expansion into the low-teens. 

Also aiding this hyperscaler growth is a high level of stickiness and deep customer engagement across data rate upgrades. Management explained that they have been able to consistently upgrade all customer engagements each cycle:  

“When you look at where we carved out this industry-leading position in networking, it started in 400-gig, and we were able to translate all of those engagements into 800-gig. And those engagements have been expanding incrementally to new opportunities, and we fully plan to translate all of our 800-gig engagements into 1.6T as well, and we're on track to do that.” Management quietly dropped that they currently have ten programs underway with 1.6T. 

Digital Native Customer Win and 2027 Ramp (Hint: It’s Likely OpenAI) 

Back in January, Celestica announced a “a significant new HPS win with a leading digital native company, who is a pioneer in the commercialization of AI applications,” collaborating with this company to “deliver a full rack, which is an optimized AI system solution built around the customer's custom ASIC accelerator.” The rack-scale solution also will include Celestica’s 1.6T switches and rack-level cooling and connectivity. At the time, Celestica said that “production for this program is expected to begin ramping in the latter part of 2026.” 

In Q3, Celestica provided an update, saying that the “design work for this program is well underway, and we expect to receive initial XPU deliveries in the second half of 2026 to support early test deployments with full-scale production expected to commence in 2027.” Management did add that 2026’s $16 billion revenue outlook does not include any contribution from this customer, but if the custom silicon “is available sooner for mass production, then we may be able to produce sooner.” 

Broadcom’s discussion around its 10GW commitment from OpenAI likely confirms that OpenAI is Celestica’s new digital native customer, with Broadcom saying that 2026 contribution from OpenAI is expected to be minimal with the 10GW deployments concentrated in 2027 through 2029.   

This would potentially be a landmark deal for Celestica in the long-run, as it is an entirely new customer with the potential to add several billion in annual revenue; management said in the original announcement that “demand from this customer at scale could achieve a level similar to those of our largest hyperscaler customers today.” For context, this would compare to Celestica’s largest hyperscaler contributing 28% of revenue in 2024, or ~$2.7 billion, implying OpenAI’s revenue could match that once it ramps.

Financials 

Celestica’s financials are somewhat mixed – on one hand, the company expects strong switch demand to drive its Cloud and Connectivity Solutions (CCS) segment revenue up ~40% YoY in both 2026 and 2027, yet gross and operating margins are quite low compared to its key supplier Broadcom.   

CCS Revenue to Grow ~40% Annually Through 2027 

Celestica was also one of the few companies to really provide a solid long-term growth outlook in its AI-related segment this past quarter, with management confident in maintaining ~40% annual growth in CCS through 2027. While this is already reflected by consensus estimates (meaning Celestica will need substantial upside as growth expectations are already being baked in to shares), there are five main factors that could push growth above and beyond this guide – more on this below. 

For 2026, Celestica guided for approximately 40% YoY growth in CCS to ~$12.6 billion, up from $9 billion guided for 2025, supported by views for accelerating 800G demand, early 1.6T ramps and the ramp of its next-gen AI compute platform to full-volume.  

Driven by this growth in CCS, Celestica guided for initial revenue of $16 billion in 2026 during Q3’s report, nearly 18% ahead of the consensus estimate for $13.6 billion. This would correspond to ~31.1% YoY growth, a five point acceleration from FY25.Supporting this, management says they “currently have about 12 to 15 months of real solid forecast inputs and demand inputs from our customers,” and in many cases, visibility extends beyond that and longer into 2027. For example, some customers have a “certain amount of ASICs, for example, that they may have committed to, and it gives us some assurance as to the longevity and the size of the overall program.”  

Also backing up the guidance is capacity, with Celestica explaining in Q2 that it can support “$3 billion to $4 billion of additional revenue” across its footprint in Thailand, Malaysia, Mexico and the US; Celestica is also aiming to expand production of 800G switches and add capacity for thousands of advanced AI racks annually by 2027. 

For 2027, management explained that it is around 12 months too early to provide concrete numbers, but “right now, we think at least 40% [CCS growth] into 2027 is what we have visibility to,” at least 40% [CCS growth] into 2027 is what we have visibility to,” with opportunities to potentially accelerate that growth. Underscoring this strong outlook includes solid visibility into significant new program ramps starting in 2027 (multiple 1.6T ramps with hyperscalers), scale-up engagements translating to production and revenue, a next-gen custom ASIC platform, and mass-production of the rack-scale custom AI system with the new digital-native customer (likely OpenAI).  

Thus, assuming ~40% growth in CCS and comments for high-single digit (6-8%) YoY growth in its Advanced Technology Solutions segment (ATS/focused on aerospace, industrial and semicap equipment), a reasonable initial estimate for Celestica’s 2027 revenue would be ~$21.3 billion. This would mark a slight two point acceleration to 33% YoY. 

Five Factors Supporting Growth Accelerating Beyond 31-33% 

There are five main factors that support Celestica’s revenue growth being materially faster than the initial 31% and 33% implied growth for 2026 and 2027, as each of these five factors all exhibit growth rates in excess of Celestica’s guidance. 

While there is no guarantee that Celestica can match or exceed some of the growth rates in the opportunities below, these five factors provide ample evidence of market conditions that can support higher growth.  

1) Ethernet Switch Demand Growing for Back-End Networking 

As we had discussed in our Top 10 New Ideas report, networking is at the heart of the new architecture that Nvidia is shipping now as the increased bandwidth is instrumental in driving higher performance. The majority of growth is expected to be driven by back-end networking — scale-up and scale-out networks.  

Scale-out is where the near-term growth opportunities for Ethernet switches lie, despite Ethernet adoption and revenue share historically lagging InfiniBand by a wide margin. High-bandwidth Ethernet switches are seeing strong demand in recent quarters as hyperscalers pivot away from Nvidia’s lock-in ecosystem of GPU + InfiniBand. Arista has said that momentum for Ethernet “has really shifted in the last year” while Nvidia touted that its new Spectrum-X Ethernet is annualizing at $10 billion in revenue. This is also validated by some of the largest operational GPU clusters of today, such as xAI’s Colossus, utilizing Ethernet for the back-end fabric (Nvidia’s Spectrum-X).   

These proof points support bullish growth forecasts for the Ethernet switching market over the next few years. Through 2025 to 2029, the high-bandwidth Ethernet switch TAM is projected to rise at a 30% CAGR, driven by >800G rates rising at a 54% CAGR. In dollar terms, the market is expanding from ~$18 billion to nearly $50 billion over the period. 

It is still quite early for the scale-up opportunity, as Broadcom and others just introduced the ESUN consortium (Ethernet for Scale-Up Networking) a few months ago. Scale-up is inherently linked to Broadcom’s 102.4T Tomahawk6 platform, which, as we had discussed in our recent newsletter, Broadcom Stock: The Silent Winner in the AI Monetization Supercycle, paves the way for >100K to 1 million accelerator clusters by allowing larger leaf-spine fabrics to be constructed, while drawing less power and keeping latency low.  

Broadcom’s management points toward the flattening of the AI cluster as an important catalyst for this product, stating: “[…] Tomahawk 6 enables clusters of more than 100,000 AI accelerators to be deployed in just two tiers instead of three … this flattening of the AI cluster is huge because it enables much better performance in training next-generation frontier models through a lower latency, higher bandwidth and lower power.”  

Broadcom already sees multiple >100K accelerator deployments using Tomahawk 6 for both scale-out and scale-up interconnect, with bookings at record rates. As such, Celestica sees scale-up as an “emerging multibillion-dollar new market opportunity,” having already secured some program wins for its first scale-up solutions leveraging Tomahawk6.  

Main takeaway: A majority of Celestica’s switch deployments already go to back-end networking, with >800G growth expected to rise at a 54% CAGR through 2030, 14 points faster than CCS revenue. Main takeaway: A majority of Celestica’s switch deployments already go to back-end networking, with >800G growth expected to rise at a 54% CAGR through 2030, 14 points faster than CCS revenue.  

2) Broadcom’s $73 Billion Backlog and AI Revenue CAGR 

Broadcom provided an update on its backlog in early December with its fiscal Q4 results, saying that its total AI semiconductor backlog was >$73 billion, with AI switch backlog exceeding $10 billion. Tomahawk6 was booking at record rates, with management later clarifying that TH6 is one of the “fastest-growing products in terms of deployment that we've ever seen of any switch products.”  

Broadcom expects the $73 billion backlog to be delivered over the next six quarters, and this is also expected to be a baseline, with CEO Hock Tan explaining that “we fully expect more bookings to come in over that period of time.”  

Broadcom also provided a strong AI revenue guide for FQ1 of $8.2 billion, implying a 100% YoY and 26% QoQ growth, primarily driven by custom AI accelerators and Ethernet switches. For 2026 and 2027 AI revenue, BofA analysts are already laying the tracks for $50 billion and $100 billion, implying growth at a 122% CAGR if this pans out. This is notably 2X faster than Broadcom’s previously-laid-out 60% serviceable addressable market CAGR of 60%.  

Analysts from RBC also believe that Broadcom’s AI semiconductor revenue acceleration “bodes well” for Celestica’s Q4 as the numbers were “’directionally positive’ for Celestica’s near-term business momentum” in CCS. 

Main takeaway: Celestica’s close ties to Broadcom suggest that its accelerating XPU and networking driven momentum and backlog growth could drive a stronger acceleration for CLS.Main takeaway: Celestica’s close ties to Broadcom suggest that its accelerating XPU and networking driven momentum and backlog growth could drive a stronger acceleration for CLS. 

3) ASICs CAGR Forecasts  

The ASICs market is forecast to see substantial growth over the next few years, as a handful of major hyperscalers pursue ASICs-based AI platform roadmaps. Marvell has projected the ASICs market to rise at a 47% CAGR from 2023 through 2028, rising from $6 billion to $40.8 billion, or nearly 7X growth in five years.  

On the other hand, 650 Group has a slightly more bullish forecast, projecting the ASICs TAM to rise at a 54% CAGR from $18 billion in 2025 to $104 billion in 2029, or a roughly 6X increase over the next four years. Broadcom’s rising backlog and increasingly large ASICs orders — $10 billion and $11 billion with Anthropic and the 10GW commitment from OpenAI – support strong growth as Google and Meta continue to build expand their ASICs platforms.  

Main takeaway: Rising demand for ASICs over the next few years can drive stronger growth for Celestica as its solutions are almost exclusively focused on ASICs platforms. Main takeaway: Rising demand for ASICs over the next few years can drive stronger growth for Celestica as its solutions are almost exclusively focused on ASICs platforms.  

4) Google’s TPU Shipments Accelerating 

While the market continues to debate the TPU vs GPU story, there are some reports from analysts that see TPU volumes accelerating over the next few years. For example, Morgan Stanley projects Google’s TPU shipments to be 1.75 million in 2025, with initial contribution of ~0.5 million from TPU v7 Ironwood.  

For 2026, the firm projected Ironwood shipments to rise 5X to 2.5 million, driving total TPU shipments up ~83% YoY to 3.2 million. For 2027, Morgan Stanley boosted its shipment forecast by ~67%, from 3 million to 5 million, driven mostly by TPU v8 and future generations, while its 2028 forecast was boosted 120% from ~3.2 million to 7 million. This would imply 2027 and 2028 growth of ~56% and ~40%, up from (6%) and 19% previously.  

There are some unsubstantiated claims that Celestica could generate $500 million in revenue per 1 million TPUs shipped, and while this is unverified, if Celestica can capture that amount ($500) per chip, the TPU linked opportunity could be increasingly large over the next few years.  

Main takeaway: Celestica could see solid revenue tailwinds linked to Google’s TPUs if shipments accelerate per some analyst estimates, assuming it remains engaged on the platform.Main takeaway: Celestica could see solid revenue tailwinds linked to Google’s TPUs if shipments accelerate per some analyst estimates, assuming it remains engaged on the platform. 

5) Meta’s Capex 

Meta’s capex strategy is to “aggressively front-load building capacity” to prepare for the most optimistic cases on when AI superintelligence will arrive, with the company outlining substantial capex growth in 2026. Meta aims to meet these capacity needs by “both building our own infrastructure and contracting with third party cloud providers.” 

As a result, Meta expects capex dollar growth to be “notably larger in 2026 than 2025,” implying 2026 capex of at least $103 billion, as current guidance for 2025 at $70-72 billion implies a minimum of ~$32 billion YoY growth. However, considering management’s comments for notably larger dollar growth, there is potential for capex to come in at or above $110 billion, up ~55% YoY, above current estimates for $107.9 billion.  

Main takeaway: Meta’s capex is expected to grow a minimum of >45% in 2026 as the company spends heavily on AI data center infrastructure, potentially driving faster growth for Celestica as it has worked closely with Meta on prior products (and potentially the upcoming next-gen AI rack ramp in Q4). Main takeaway: Meta’s capex is expected to grow a minimum of >45% in 2026 as the company spends heavily on AI data center infrastructure, potentially driving faster growth for Celestica as it has worked closely with Meta on prior products (and potentially the upcoming next-gen AI rack ramp in Q4).  

Key Risk – Communications Growth Decelerating Sharply QoQ 

Celestica’s CCS segment is broken down further into two other subsegments – Communications (networking) and Enterprise (servers and storage). This breakdown highlights a key risk moving to Q4, as guidance implies Communications revenue will decelerate sharply QoQ, an odd print considering the strong ramp in switching products. 

In Q3, revenue from CCS segment rose 43% YoY to $2.41 billion, driven by an 82% YoY increase in Communications revenue to $1.94 billion offsetting a (24%) decline in Enterprise to $477 million on an AI program transition with a hyperscaler.   

For Q4, CCS revenue is implied to accelerate nine points to 52% YoY, with Communications growth guided in the high-60s YoY and Enterprise guided in the low-20s as the new AI program is set to ramp. Despite the seemingly strong guide in Communications, QoQ growth would be just 1% QoQ, a sharp deceleration from Q3’s 18% QoQ growth. 

This would mark Communications’ lowest sequential growth in the last two years, and its first time reporting single-digit sequential growth in the last seven quarters, raising a potential red flag considering Communications is primarily driven by networking/800G switches.  

A likely explanation of this could be the strong outperformance in Communications in Q3 – guidance was for low-60s YoY growth, which Celestica beat by ~20 points. As a result, QoQ growth was likely expected to be ~4%, but came in at 18%, possibly representing a much stronger-than-expected ramp of 800G platforms in the quarter.  

Margins 

Margins continued to expand in Q3, with some signs of operating leverage arising from strong Communications growth as operating margin expanded by 4.7 points YoY versus a 2.6 point YoY expansion for gross margin.  

• GAAP gross margin was 13.0% in Q3, up 0.2 points QoQ and 2.6 points YoY. 
• GAAP operating margin of 10.2%, up 0.8 points QoQ and 4.7 points YoY. Adjusted operating margin was 7.6%, up 0.2 points QoQ and 0.8 points YoY.  
• GAAP net margin of 8.4%, up 1.1 points QoQ and 4.8 points YoY. However, adjusted net margin was just 5.7%, up just 0.1 points QoQ and 0.7 points YoY due to a $113 million impact from gains on total return swaps.  

For a segment breakdown: 

• CCS adjusted gross margin was 12.1% in Q3, up from 11.9% a year ago. CCS adjusted operating margin was 8.3%, up from 7.6% a year ago. Positioning as an ODM may not find much more margin upside even as higher-margin products such as advanced AI rack systems ramp.  
• ATS adjusted gross margin was 10.6%, up from 8.4% a year ago. ATS adjusted operating margin was 5.5%, up from 4.9% a year ago. 

For fiscal 2025, Celestica guided for adjusted operating margin to be 7.4%, and for 2026, only a slight 0.4 point increase to 7.8% despite the 31% growth on the top-line. This suggests that its positioning primarily as an ODM may limit future upside to operating margins even as hyperscaler-linked revenue and higher-margin, higher-complexity designs increase in its mix:  

“So we continue to see the benefits of both operating leverage as well as positive mix in our numbers, on track for about 7.4% operating margin at the company level for 2025, and we're guiding that, that can expand now going into 2026. We do continue to believe that there's opportunities for even more margin expansion. But again, I'm not giving formal numbers for '27 at this point. 

When you look at our ATS business, the business has done very well on doing some selective pruning in order to really focus on the highest value engagement. And so we're really happy with the margin expansion that we've seen in ATS already. And we think that there's opportunities to continue to expand and get it above 6%, hopefully in the near to medium term. 

On the CCS side, which is operating in the low 8s right now, what's working to our favor is the fact that we will continue to be seeing growth in networking, which are primarily our HPS products. And our HPS products are accretive to the company and accretive to CCS. And so as we see growth in that area, we will continue to see some margin upside. 

That being said, we do continue to evaluate how we can support our customers on multiple areas such as doing complex rack integration work. And so sometimes that will be margin dilutive.” 

Earnings 

Celestica reported GAAP EPS of $2.31 in Q3, beating the $1.38 estimate by 67.6%. Adjusted EPS was $1.58, beating the $1.49 estimate by just 6% and representing growth of 52% YoY.  

For Q4, Celestica guided adjusted EPS to be in the range of $1.65 to $1.81, which, at the $1.73 midpoint, is only marginally ahead of estimates for $1.71. This also corresponds to a slight acceleration to 55.9% growth. Looking ahead to Q1 and Q2, estimates point to 52.3% growth and 41.5% growth, decelerating in both quarters, likely driven by margin expansion slowing. 

For fiscal 2025, Celestica boosted its adjusted EPS outlook by 7.3% to $5.90, from its previous forecast for $5.50 and pointing to 51% YoY growth. For fiscal 2026, Celestica outlined an initial guide for $8.20 in adjusted EPS, up 39% YoY and well ahead of estimates for $7.22.  

Cash 

On the other hand, cash flows are rather thin and fell to the lowest level in a year.  

Operating cash flow was $126.2 million, or a 4% margin, down from 5.3% in Q2 and 4.9% in the year ago quarter. OCF growth was just 2.4% YoY and was also the lowest cash flow since the year ago quarter.  

Adjusted FCF was $89 million for a 2.8% margin in Q3, up 15.6% YoY but also the lowest level since the year ago quarter. Adjusted FCF margin was down from 4.1% in Q2 and 3% in the year ago quarter.  

For fiscal 2025, Celestica raised its adjusted FCF guidance slightly to $425 million, from $400 million prior, for a 3.5% margin, while capex is guided to $200 million, or 1.6% of revenue. Fiscal 2026 adjusted FCF was guided at $500 million, up 18% YoY and for a 3.1% margin, with the margin decline driven by higher capex, guided to rise 50-100% YoY to $300 to $400 million, or 2.2-2.5% of revenue.  

Cash and equivalents totaled $305 million while debt totaled $728 million in term loans. Including an undrawn revolver, total liquidity is approximately $1.1 billion. Celestica’s gross debt to TTM adjusted EBITDA was 0.8x, improving by 0.1 points sequentially and 0.3 points from last year. 

Inventories were $2.05 billion, up nearly 7% QoQ, while accounts receivable totaled $2.44 billion, also up nearly 7% QoQ. 

Valuation 

Celestica is trading just off peak multiples on the top and bottom line following this recent pullback after Broadcom’s earnings. Celestica’s forward PS is currently at 2.5x, well above the five-year average of 0.75x and 25% above the 2x multiple it commanded at the start of September. Even on the fiscal 2026 guide, shares are at a 1.9x multiple. 

On a forward PE basis, shares are trading at 45.7x fiscal 2025 adjusted EPS and 32.3x fiscal 2026, well above its five-year average forward PE of 15.4x and prior resistance at 25x in late 2024 and early 2025. The company has been seeing a re-rating higher as it captures AI-growth tailwinds, but any hint of softness in growth could easily see Celestica re-rated lower given growth through 2027 is visible and may already be priced in.  

Conclusion 

Celestica is benefiting from strong market demand for 800G switches with its Tomahawk6-based 1.6T switches on deck for availability later in 2026. The company guided for an impressive five-point acceleration in 2026 during Q3’s report, outlining more than 31% growth to $16 billion in revenue. 2027 was implied to accelerate slightly to around 33% YoY to surpass $21 billion in revenue, again on strong switch demand, the ramp of 1.6T programs, and a new custom rack-scale solution with a digital native customer entering the picture, likely OpenAI. 

However, Celestica’s valuation remains quite stretched, with the company sitting well above its five-year average multiples on the top and bottom line as shares are being re-rated higher for its visible topline acceleration and strong 40% growth momentum in CCS – this extended valuation will need to be watched considering growth expectations could be getting priced in already given the high level of visibility into 2027.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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