The rapid rise of generative AI has made a household name out of chipmaker Nvidia (NVDA). But growing investment in the underlying infrastructure to power AI data centers has also provided a boost to the more under-the-radar stocks, led by Vertiv Holdings (VRT).
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Vertiv stock has surged 150% year to date and is up more than 780% since the start of 2023, as of the close on Nov. 6. Those gains have come as tech giants like Amazon.com (AMZN), Microsoft (MSFT), Alphabet (GOOGL) and Meta (META) pledge to spend billions to build data centers that can provide computing power for artificial intelligence applications. Vertiv, in turn, provides the equipment that powers and cools those data centers.
Vertiv’s recent third-quarter report beat estimates with a 46% increase in earnings and 19% revenue growth. On a conference call following the report, Executive Chairman David Cote acknowledged that investors often “oscillate between fear and excitement” about the AI opportunity. But he views the world as still only in the early stages of the digital revolution.
“AI is just the next step in that digital revolution,” Cote told analysts. “AI is real. It has just begun. It’s got a long way to go. Data centers are fundamental to all that computing.”
Cashing In On Data Center Infrastructure
Based in Westerville, Ohio, Vertiv offers power, cooling and IT infrastructure solutions and services focused on data centers. Wall Street analysts like Vertiv as a way to play the rising spending on data centers that power both AI and cloud computing.
Vertiv stock is unanimously rated a buy by the 16 analysts tracking the company on FactSet.
“Vertiv should benefit from growth in the data center market broadly,” BofA Securities analyst Andrew Obin wrote in a September client note. “We estimate they are the largest provider of thermal equipment and the second-largest vendor of electrical equipment to data centers globally. “
Capital expenditures on data centers reached $215 billion globally last year, as estimated by BofA Securities. About three-quarters of that spending went to IT equipment such as servers, networking and data storage. The other 25%, however, is spent on what BofA calls data center infrastructure — including construction, electrical, thermal systems, generators and general engineering.
Research firm Gartner, meanwhile, projects that spending on data center systems will reach $318 billion this year, up 34% from a year earlier. In 2025, Gartner sees data center spending growing 15.5% to $367 billion, outpacing the 9.3% rise that Gartner projects for overall global IT spending.
Vertiv Stock: Nvidia Partnership
That demand has helped Vertiv. Analysts project the company’s 2024 adjusted earnings will rise 49% on a per-share basis, to $2.64, while sales increase 14% to $7.8 billion.
“The digital infrastructure is a very essential element (for data centers),” Vertiv Chief Executive Giordano Albertazzi said in a recently published interview with Investor’s Business Daily. “The power and thermal really keeps the thing alive and working.”
The company is homing in on its AI opportunity. Last month, Vertiv revealed a detailed reference design for power and cooling infrastructure for Nvidia’s latest Blackwell AI graphics processing unit.
“New data centers are built for accelerated computing and generative AI with architectures that are significantly more complex than those for general-purpose computing,” Nvidia CEO Jensen Huang said in an Oct. 15 news release. “With Vertiv’s world-class cooling and power technologies, Nvidia can realize our vision to reinvent computing and build a new industry of AI factories that produce digital intelligence to benefit every company and industry.”
Evercore ISI analyst Amit Daryanani sees a big opportunity for Vertiv as the demands for AI computing shift more data centers from using traditional air-cooling to liquid-cooling systems.
“(Vertiv) offers a comprehensive end-to-end portfolio of liquid cooling solutions,” Daryanani wrote to clients last month. “We believe Vertiv is best positioned to benefit from the liquid cooling opportunity.”
Vertiv Eyes ‘Long-Term,’ Secular Trend
Vertiv traces back to the 1960s, when it was founded as the Liebert Corp., the first manufacturer of air conditioning units for computer rooms. The business was acquired by Emerson Electric (EMR) in 1987. Emerson spun off its data center and communications networks focused division, Network Power, in 2015 to create Vertiv.
Vertiv went public through a merger with a special purpose acquisition company in February 2020. Since then, shares have advanced more than 900%, with those gains weighted heavily toward the past two years.
A big question amid the red-hot run is whether tech giants and other industry players can sustain the big spending. Tech giants like Amazon, Microsoft and Meta are upping their capital expenditures plans related to AI, but that spending is coming under greater scrutiny from investors.
The first risk factor listed by Vertiv in its 2023 annual report is that it relies on “continued growth of our customers’ networks, in particular data center and communication networks.” It also faces competition from large players such as Schneider Electric and Eaton Corp. (ETN)
Vertiv CEO Albertazzi, however, told IBD that the company views the current data center growth as a “long-term, secular trend.”
Vertiv Stock: Third-Quarter Results Beat Expectations
Meanwhile, Vertiv broke out from a cup-with-handle base on Oct. 3, passing a 103.69 buy point, according to IBD MarketSurge. In recent trading days, Vertiv has rallied along with the broader stock market following Donald Trump’s election to a second presidential term. A 14% gain for the week through Thursday has the stock approaching a profit-taking zone from the October breakout.
Market reaction to Vertiv’s third quarter earnings report was mixed. Shares fell 3.7% in next-day trading following the Oct. 23 report despite bullish commentary from analysts. Vertiv earned an adjusted 76 cents a share on sales of $2.07 billion in the September quarter, ahead of FactSet analyst estimates for earnings of 69 cents a share on sales of $1.98 billion. But Vertiv’s guidance for fourth-quarter revenue of $2.14 billion was slightly below estimates for $2.16 billion.
The next potential catalyst for Vertiv could be an investor event and presentation scheduled for Nov. 18. In the meantime, analysts remain bullish.
“Continued strength in data center demand, combined with rising rack heat densities, positions VRT as our favorite way to play secular growth in AI data centers,” Jefferies analyst Saree Boroditsky wrote in a Nov. 5 client note.
Further, Vertiv holds a best-possible Composite Rating of 99, according to IBD Stock Checkup. The stock’s Relative Strength Rating is a very strong 98, meaning it is outperforming most stocks tracked by IBD. Its EPS Rating stands at 97 as well, underscoring strong earnings performance.
Overall, Vertiv ranks first in the electrical and power equipment group tracked by IBD.
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