1 Investment Opportunity in Overheated Data Center Sector – Pending Potential Temperature Reduction
With the rapid rise of artificial intelligence (AI) in big-tech data centers, the investment world is now grappling with a new set of challenges—primarily, the increased energy consumption. The semiconductor systems, including those from tech giant Nvidia, are notorious for guzzling enormous amounts of energy. This energy hunger has fueled expectations for global power demand to skyrocket.
Nvidia, however, remains unfazed. The company has an impressive ecosystem of engineering partners working tirelessly to tackle the problems associated with energy delivery and data centers. One of these partners, which was recently touted by Nvidia CEO Jensen Huang, is Vertiv Holdings (VRT). The stock could be a solid investment, provided its price pulses within reasonable limits.
Vertiv: Powerful in Data Center Engineering
Before 2023, Vertiv was typically synonymous with industrial energy engineering and had a rather mundane existence. The company was spun off from Emerson Electric in 2016 and then sold to private equity in 2016. In 2020, the name was changed to Vertiv, and it launched its public debut via an SPAC.
Things started to look up for Vertiv in 2023, when the market began to appreciate its potential in data center applications. This momentum continued until March 2024, when Vertiv was officially welcomed into the Nvidia Partner Network, leading to a significant surge in the stock price.
Vertiv specializes in the design and production of power delivery and management systems for data center servers. As electrical systems require more energy, they inevitably produce more heat – a problem that Vertiv addresses through its advanced cooling systems. Being chosen by Nvidia as a key consultant in power and cooling systems has boosted investor confidence, given the company's rapid growth trajectory.
Integral in the Data Center Supply Chain
Vertiv's stock surge is nothing short of impressive, but whether it's worth the current premium is up for debate. At a market cap of over $36 billion after a recent price surge, Vertiv's stock price is valued at nearly 40 times its expected 2024 earnings per share (EPS). While this isn't the wildest valuation in the AI frenzy, it raises questions about whether the growth potential is already accommodated in the stock price.
Vertiv expects organic revenue growth to soar about 12% this year. The company's backlog of equipment and service orders has also ballooned by 15% to $6.3 billion in just a quarter. This growth seems priced in, which means Vertiv will need to exceed expectations if it's to justify its current valuation.
Vertiv: A Long-Term Play, but at What Price?
Vertiv is indeed an intriguing opportunity in the AI game, with a strong position in the data center supply chain, particularly as a vital provider for Nvidia. While the current valuation might be a little too heady for some, Vertiv's growth prospects seem promising, given its leadership in the power and cooling domain. It remains on many investors' watchlist, with some waiting for a potential price correction before making their move.
Enrichment Data Insights
- Vertical Industry Outlook: Vertiv has seen robust revenue growth over the past few years, with a 13% increase in the previous year and a 54% surge overall in the past three years.[1] Its shares have also experienced a sizable rally, climbing by 26% in the preceding month and recording an annual gain of 181%.[1]
- Market Position: Vertiv holds a significant market share in power and cooling applications for data centers, making it a prime beneficiary of the AI-led data center buildout.[2]
- Future Projections: At its November Analyst Day, Vertiv raised its organic sales guidance to a 12-14% compound annual growth rate (CAGR) over the next five years.[2] The company also expects an adjusted operating profit margin of 16-18% for 2025.[2]
- AI-Driven Demand: The growing demand for data center solutions fueled by artificial intelligence appears set to continue, with Vertiv well-positioned to capitalize on this trend.[3]
- Collaboration with Industry Giants: Vertiv is collaborating with NVIDIA and Ansys to accelerate data center innovation.[4] This partnership leverages NVIDIA's powerful GPUs and Ansys' modeling and simulation tools to optimize cooling strategies and enhance product design efficiency.[4]
- Valuation: Vertiv boasts a price-to-sales (P/S) ratio of 7.4x, which is higher than the industry average.[1] This might be justified by Vertiv's revenue growth prospects and its leadership in the data center cooling market.[1] However, it also raises concerns about the potential for future disappointment if the P/S ratio contracts to more standard levels.[1]
The company's collaboration with Nvidia and Ansys, aimed at optimizing cooling strategies and enhancing product design efficiency, is a testament to Vertiv's commitment to staying at the forefront of data center innovation. Investors considering Vertiv as a long-term play should carefully consider its current valuation, which stands at a higher price-to-sales (P/S) ratio than the industry average, mainly due to its robust revenue growth prospects and leadership in the data center cooling market.