Vertiv Holdings: The Unsung Hero in the AI Infrastructure Boom

Forget Nvidia: 1 Other Artificial Intelligence (AI) Data Center Stock to Buy Right This Instant

Vertiv is emerging as a major beneficiary of thermal management solutions for data centers. Artificial intelligence (AI) has undoubtedly played a big role in fueling positive market sentiment over the last two years. At the same time, investors should be aware that not all AI opportunities have the same potential. One pocket of the AI landscape that I think is particularly lucrative for long-term investors is data center services. Data is increasingly becoming more important for business leaders to make more informed decisions. Moreover, generative AI applications for autonomous driving, large language models, and machine learning all rely on vast loads of data. While Nvidia has emerged as a darling in the data center arena, savvy investors know that other opportunities are out there. Let's dig into why I see Vertiv Holdings (VRT -4.56%) as a compelling opportunity in the data center space and think right now is as good a time as ever to scoop up some shares. What does Vertiv do? Vertiv provides digital infrastructure solutions for data centers, communications networks, and commercial and industrial environments. Approximately two-thirds of the company's sales are derived from power management and thermal management products such as switchboards and chilling solutions. Why Vertiv is emerging as a data center leader Have you ever been working on a laptop only to have the computer begin to glitch and suddenly give off some heat? Understanding why this might happen draws parallels to how data centers work. More importantly, it will help paint a picture as to why Vertiv is ideally positioned in the data center market right now. At their core, data centers are simply enormous buildings that house rows of server racks. These racks contain a number of IT infrastructure products, namely high-performance semiconductor chips. These chips, dubbed graphics processing units (GPUs), are constantly processing tons of information. As a result, server racks can experience intense heat. This can be a major risk to data centers, and companies like Vertiv are working to combat this issue. Namely, thermal management solutions can help cool down server racks and dissipate overheating in data centers. According to Mordor Intelligence, the data center cooling market is currently worth $16.6 billion. However, research suggests that the data center cooling market will expand at a compound annual growth rate of 16% through 2029 -- making the addressable market worth $34.5 billion by the end of the decade. A premium valuation well worth the price The chart below shows Vertiv's forward price-to-earnings (P/E) ratio of 36.9. While this is well above the S&P 500's forward P/E of 22, I think the premium is warranted. While Vertiv stock is by no means a bargain, I see it as both an especially good and possibly misunderstood opportunity. And this year, I think the stock has enjoyed some momentum thanks to broader positive sentiment in the technology space, and AI businesses in particular. VRT PE Ratio (Forward) data by YCharts As I alluded to earlier, each opportunity in AI is different, and the same notion can be applied to subsets of the broader AI landscape. In general, the market for data centers should continue to witness outsize growth as data becomes ever more important for developing breakthrough AI applications. However, the rising need for data should also lead to more demand for cooling and thermal management solutions. Investors who are looking for under-the-radar opportunities in AI -- and particularly data center services -- may want to consider a position in Vertiv. As AI becomes increasingly more utilized across different end markets and use cases, the demand trends for thermal management solutions explored above could actually be conservative. All of this should ultimately benefit Vertiv for years to come.

Vertiv stock holds Outperform amid AI growth prospects By Investing.com

On Tuesday, an analyst from Evercore ISI maintained an Outperform rating on shares of Vertiv Holdings Co. (NYSE:VRT) with a $105.00 price target. The analyst highlighted Vertiv's addition to the firm's Tactical Outperform list before the company's announcement of second-quarter results, scheduled for Wednesday, July 24, before the market opens. The decision is influenced by robust artificial intelligence (AI) and server market indicators, such as Nvidia (NASDAQ:NVDA)'s recent performance and upward revisions to IDC's server forecast. Despite Vertiv's stock underperformance compared to the S&P 500 and AI-focused companies since its first-quarter results, the analyst anticipates the stock could rise on better-than-expected second-quarter outcomes. Vertiv is expected to report moderate upside when it releases its June quarter results, supported by strong Q2 data center infrastructure spending, especially in AI. However, the spotlight will likely be on the company's order trajectory and potential revenue acceleration in calendar year 2025 (CY25). With positive investor sentiment around AI, expectations for year-over-year growth are high, but the current consensus for the September quarter revenue estimates is considered conservative, with a modest sequential increase. The analyst predicts Vertiv will offer third-quarter guidance that meets or exceeds market expectations. From an order standpoint, a mid-single-digit sequential decrease is anticipated for the June quarter after a strong Q1, but year-over-year, orders are expected to be significantly higher, in the 35-40% range. The company's momentum in orders is forecasted to outpace revenue performance, setting the stage for a second-half acceleration as AI infrastructure spending increases. Notable factors contributing to this outlook include AI infrastructure's contribution to second-quarter results, progress on capacity expansion for liquid cooling, an anticipated acceleration in hyperscale capital expenditures, and positive year-over-year pricing providing tailwinds. Additionally, the backlog and orders are projected to exceed revenue growth, albeit likely lower quarter-over-quarter. Margin improvements are also expected as Vertiv benefits from operational expense scalability. While enterprise IT shows signs of improvement and the server forecast for calendar year 2024 has been raised, service provider capital expenditures remain soft and challenges in China may continue. Overall, the year-over-year order trajectory is expected to remain robust, and the analyst expressed a positive outlook on Vertiv's positioning in the AI data physical infrastructure market, suggesting AI could drive a multi-year upcycle in physical infrastructure spending. In other recent news, Vertiv Holdings Co. demonstrated a robust financial performance in the first quarter of 2024, with an 8% increase in sales and a significant surge in orders across all regions. The company's adjusted operating profit reached $249 million, and the company initiated a share repurchase program while raising its full-year guidance to predict a 12% organic growth and operating margins of 17.7%. Oppenheimer increased its price target for Vertiv to $98, following the company's impressive performance that surpassed analysts' expectations. Evercore ISI also raised its price target for Vertiv to $105, maintaining an Outperform rating and highlighting the company's comprehensive solutions as a key advantage. Similarly, Citi kept a 'Buy' rating on Vertiv's stock, emphasizing the company's strong standing in thermal and power sectors, including liquid cooling technologies. RBC Capital upheld an 'Outperform' rating for Vertiv, appreciating the successful introduction of the company's AI-driven business outcomes platform. As Vertiv Holdings Co. (NYSE:VRT) gears up to announce its second-quarter results, investors are eyeing the company's performance with keen interest. According to InvestingPro data, Vertiv boasts a market capitalization of $32.9 billion, signaling a substantial presence in the industry. Despite a high P/E ratio of 83.3, the company's PEG ratio stands at an attractive 0.34, hinting at potential growth relative to earnings. Furthermore, Vertiv's revenue growth over the last twelve months has been impressive at 15.27%, underscoring the company's strong financial trajectory. InvestingPro Tips suggest that Vertiv's net income is expected to grow this year, and the company is trading at a low P/E ratio in relation to near-term earnings growth, which may appeal to value investors. Moreover, with analysts predicting profitability for the current year and a large price uptick over the past six months, Vertiv's stock movements have captured the market's attention. For readers interested in further insights, there are 15 additional InvestingPro Tips available, which can be accessed for Vertiv at https://www.investing.com/pro/VRT. To enhance your investment analysis, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.

Vertiv Holdings: Lot Of Potential Ahead, But I Will Not Be Chasing (NYSE:VRT)

Valuation model suggests Vertiv Holdings' intrinsic value is around $57.5 a share, indicating it may be expensive to start a position at the current price. Vertiv Holdings (NYSE:VRT) has had a tremendous run in the past year, going up almost 250% as of the time of this article, so I wanted to take a look at the company's financials and see whether it would be a good time still to start a position. The company is positioned well to capitalize on the ever-strong demand for data centers with AI capabilities that are becoming more power-hungry by the hour and with the company's liquid-cooling technology set to become a norm in the near future, it has the potential to continue to outperform. However, I am not seeing that translating into neck-breaking revenue growth that other AI companies saw in the last year; therefore, I will not be chasing the gains here and will wait for more quarters to see how those numbers progress. Looking at the company's revenue growth since Jan 2023, we can see a steady increase, however, not at the rate I would have expected to see from a company that saw its share price rising over 200% in one year. The first half of 2023 saw some decent growth numbers. Q1 saw over 31% growth, followed by around 24% in Q2, 17.6% in Q3, 12.74% in Q4, and the latest quarter of 2024 saw around 8% growth. So, the growth has slowed down, with the company now forecasting full-year 2024 growth to be around 12%, which means we will see slightly higher growth numbers in the following quarters, 12%+, a far cry from Q1 '23. Over the last 4 years, the company has averaged around 16% CAGR, which may not be as accurate any longer given the rise of AI-capable data centers that require much more power and cooling. Over the same period, we can see the company's operational efficiency has improved quite a bit, with massive improvements across the board. Gross and EBIT margins saw around 550bps and over 700bps, respectively. Such an improvement can be attributed to favorable price costs and higher sales volume, especially in the Americas where the company was able to leverage its fixed price of production, resulting in economies of scale. The management has mentioned in previous transcripts that the long-term goal of efficiency is to reach an adjusted operating margin of 20% plus. In Q1 '24, that number stood at 17.7%. To be honest, it's hard to gauge what the management thinks of 20% plus means, is that above 25% or below in the long term? My guess is, it is below; otherwise, they would have said it was 25% plus. Continuing with efficiency and profitability, the company's return on assets and equity unsurprisingly saw a decent run-up in the last year, since the company's bottom line expanded quite a bit. I think ROA is a little low. It's about the lowest I would accept if I were to invest in a company, while ROE is much higher than my minimum of 10%. The two together tell me that the management is doing an OK job at utilizing the company's assets, while doing an outstanding job at utilizing shareholder capital, thus creating value. In terms of competitive advantage and moat, I like to look at the total return on capital compared to the company's peers, which I found on the VRT's latest 10K filing. The company doesn't explicitly list Super Micro Computer (SMCI) as its competitor, but many are drawing comparisons due to being involved in the data center hype, although provides different products, I will add to the comparison too because of that. Here, we can see VRT and SMCI leading the pack, with SMCI taking the number one spot while VRT is a close second. We can also see that VRT is closing the gap relatively quickly and may pass SMCI in the next couple of quarters. In terms of the company's financial position, as of Q1 '24, which was filed on April 26, it is slightly outdated now but until the next earnings that is the best we have, VRT had around $276m in cash, and equivalents, against almost $3B in long-term debt. The ratio here is not great in my opinion, but is it worrisome? I like to look at the company's interest coverage ratio to decide. At the end of FY23, the company's interest coverage ratio was around 5x, meaning operating profit was able to cover annual interest expense around 5 times, which is what I like to see as a minimum because I am leaning more towards being conservative. However, many analysts consider a coverage ratio of 2x to be sufficient. As of Q1 '24, the company's ratio stood at a little over 5x; therefore, I don't think the amount of debt on the books is a problem. VRT is not at risk of insolvency. Overall, the company's performance has been decent. I don't think that this type of performance warranted its value going up over 200% in a year, but it may be just the beginning of something very special. The CEO of the company Giordano Albertazzi mentioned in some video interviews right around the time Q1 '24 numbers came out that he expects demand to accelerate for the liquid-cooling products throughout '24 and into '25, so should we expect the company's top-line growth to accelerate also? Time will tell. I think the company is positioned very well for the future. The company's liquid-cooling product will continue to be of utmost importance going forward. Data centers with AI capabilities will just become more power-hungry in the next couple of years and further. Air cooling although is sufficient right now, I would expect data centers to transition to a more efficient way of cooling, like liquid cooling. Liquids transfer heat a lot more efficiently than air, which means they can be much more efficient at cooling high-density servers. Furthermore, liquid cooling systems are much like direct-to-chip cooling and are much more scalable. Given VRT's position in the space, I believe it will continue to have a lot of demand in the upcoming years. The company is a leader right now, which means it is the company to take the crown from, but I don't see this happening any time soon. In terms of the company's outlook, I am somewhat unimpressed with the company's top-line growth potential. As I mentioned earlier, the company expects to grow at around 12% for FY24, which is below its 3-year average, and this is during the AI hype era that we currently are in. I would like to see how the numbers are going to progress over the next couple of quarters, and I would like to see that acceleration that the CEO mentioned. The visibility of revenues, we know that recently the company grew its orders by 60% y/y, with a book-to-bill ratio sitting at an astounding 1.5x. The backlog in Q1 was around $6.3B, which is less than the company made in FY23, and $1.5B less than it is projected to make for FY24, so the backlog is less than a year's worth of sales. It takes about 9-12 months to convert the backlog into sales. I would like to see how the backlog orders grow in the upcoming quarter. I don't think it is going to be more than the company saw in the first quarter. The company's book-to-bill ratio is also not sustainable, and the management expects it to come down throughout the year but will be above 1x for at least the rest of the year. So, it is hard to come up with some reasonable top-line growth levels. Analysts are estimating low-teens growth for the next few years, while seeing very robust improvement in EPS going forward. The company will become much more efficient over the next while. Let's look at some valuation assumptions. So, given what we know of the company's top-line growth, it is hard to assume the company's top-line growth is going to accelerate. Therefore, for revenues, I went with around 10% CAGR for the next decade, with a slight acceleration in 2025. After that, I modeled that the growth would start to taper off to 5% by FY33. To give myself a range of possible outcomes, I modeled two other scenarios, an optimistic and a more conservative one. For margins, I alluded to this earlier, the management expects to see adjusted operating margins to be 20%+ in the long term, so I decided to start with around 20% operating margins in FY24, and increase these linearly to around 25% by FY33, which I think is not as conservative as I would have liked to approach but the outcome as you will see in the numbers later won't be very different. For FY25 and 26, the company will see 33% and 32% growth in EPS, respectively, which is about what analysts are expecting too. Below are those assumptions. I am also going to be using the company's WACC of 10.5% as my discount rate, and I decided to use 2.5% as my terminal growth rate. I usually go with this rate because I would like the company to at least match the US long-term inflation goal. Furthermore, I usually would like to apply a larger discount to the final intrinsic value, but I went with 10% for the company. There isn't a lot of margin of safety baked into these assumptions, but the result won't change too much. With that said, VRT's intrinsic value is around $57.5 a share, which means it is a bit expensive to start a position right now. The model is based on revenues that are kind of mediocre at best, especially for a company that went up over 200% in the last year. When Nvidia (NVDA) went up over 200%, its revenues went up 300% y/y, so that was understandable, but VRT's only decent growth recently was its organic order growth. I couldn't assign a much higher revenue growth than just a slight acceleration after 2024. I would like to see these numbers show a decent acceleration in the upcoming quarters. Furthermore, the model already took into account the company's long-term operating margin profile of 20%+, which is still not there by around 230bps as of the latest guidance given for FY24. The company is going to be quite important going forward, but I am not going to be chasing it right now as I don't think there was a reason for it to perform this well in the beginning, which to me seems like it was people betting on the company's AI potential with NVDA and overall, AI hype. I do not see the growth numbers associated with the AI hype in how the company has performed and will perform in 2024; therefore, I am going to hold off for now and continue to follow the company from the sidelines. I clearly missed the boat over the last year, so I will not be jumping on board now. I may miss another run-up, but that is going to be ok for me. To everyone who managed to get in on the run, congratulations on your fat gains!