Will AI-driven datacenter demand power Vertiv’s growth?
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Computer chipmakers aren’t the only ones benefiting from the growth in artificial intelligence development. For one, Vertiv Holdings Co. (NYSE:VRT) is seeing its sales soar from the demand for cooling of AI data centers, and could be another way to play the AI growth story. Its stock price has climbed about 265% in the last year, closing at $86.88 on June 27.
Westerville, Ohio-based Vertiv describes itself as engaged in the “design, manufacturing and servicing of critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data,” aiming to ensure that “critical technologies always work” and empowering “the vital applications of the digital world.”
Reporting on the company’s performance for its first quarter ended March 31, 2024, Giordano Albertazzi, Vertiv’s Chief Executive Officer, said that orders grew 60% during this period “reflecting increasing pipeline velocity and acceleration of AI-driven demand.”
According to Albertazzi, the company’s order patterns, with longer lead times based on customer build schedules, mostly in 2025 and beyond, suggest that AI is starting to gain scale. He said, “Though still in its early stages, AI is quickly becoming a pervasive theme across our end markets. Continued advances in GPU (graphics processing units that power AI) development and other AI-enabling technologies are necessitating changes and upgrades to the critical digital infrastructure.”
To take advantage of this demand, Vertiv is advancing its portfolio to enable high-density and GPU-based deployments, drawing on its global capacity, extensive digital infrastructure offerings and strategic customer partnerships.
AI-led data center energy consumption fuels demand
Growth for Vertiv comes about as data centers that enable AI house multiple computers that consume enormous amounts of energy and need to be cooled, creating demand for Vertiv’s cooling solutions. For instance, if you run a Chat GPT query, that takes ten times as much energy as required for a typical Google search query.
All this AI energy consumption creates more demand for data center cooling. According to a Wall Street Journal report citing Goldman Sachs, the market for server cooling will grow from $4.1 billion in 2024 to $10.6 billion in 2026. While data centers mostly use air circulation to maintain cooler temperatures, more powerful chips require more effective liquid cooling, a need Vertiv is looking to address.
And while 10% to 20% of U.S. data center energy consumption currently goes towards AI use, AI will take up significantly more share in future, according to the Electric Power Research Institute. With the tech giants looking to outrace the competition and cash in on AI, the amount of computing power required to train AI has a tendency to double every nine months.
According to the International Energy Agency, data centers globally used up about 460 terawatt-hours of energy in 2022 and this could rise to more than 1,000 TWh by 2026. That’s about equal to the energy consumed by Japan. This rising need for power also creates demand for Vertiv’s power-related offerings, such as its power control and monitoring systems.
Strategic partnerships and acquisitions
Vertiv goes back to 1946 and has a history of providing air-conditioning for computer rooms as well as power-related solutions, such as power systems and power transfer switches. Ultimately, the company became Emerson Network Power in 2016 and then went public in 2020 through a special purpose acquisition company.
The company serves three business segments, data centers (75% of its market), communications networks (15%) and commercial and industrial (10%). Commercial and industrial includes various industries, such as manufacturing, that use Vertiv’s offerings to keep their critical systems working.
By geography, in 2023 the Americas made up its largest market region (at 56% of its market), with the Asia Pacific (APAC) and Europe, Middle East and Asia (EMEA) regions each accounting for 22% each of Vertiv’s market share.
Vertiv has entered into strategic partnerships to power growth. For one, it has become a member of Nvidia’s partner network, providing consulting services to Nvidia customers dealing with GPU cooling issues.
The company has also made strategic acquisitions to enable its growth, including that of CoolTera last December. The provider of liquid cooling solutions will better position Vertiv to cater to data center AI cooling needs.
Also, in 2021 Vertiv acquired E&I Engineering, an Ireland-based private company providing power-related infrastructure, such as switchgear and busbar. That acquisition enables Vertiv to offer “integrated power and modular solutions,” and better serve and acquire large customers such as “hyperscale cloud providers.” Vertiv reports that it has more than doubled its manufacturing capacity for power-related solutions since the acquisition and expects to double its capacity again by the end of 2025.
The company also looks to invest as much as $200 million in capital expenditure for 2024 to boost its offerings.
Environmental and privacy concerns
Considering the scope for environmental pollution from emissions at data centers and manufacturing facilities, Vertiv is subject to various environmental and safety laws. The company also handles hazardous materials at its manufacturing facilities and could be held liable for contamination in case it releases any such materials into the environment.
And as environmental and climate change concerns become more of an issue, there could be more scrutiny of Vertiv and its customers, which could negatively impact the company’s business.
Electrical equipment is also subject to manufacturing laws in some regions restricting the use of certain materials such as lead.
Another risk is that laws related to data protection and privacy are still evolving and more stringent laws could have a backlash for Vertiv’s customers such as Nvidia and others in the AI sector. Those fallouts could in turn negatively impact Vertiv’s business prospects.
Also, Vertiv faces competition from other data center cooling providers such as Schneider Electric and Stulz Gmbh (besides large companies such as Eaton Corp. in the power infrastructure space). According to Vertiv, the company has more holistic offerings than its competitors who tend on focus on a specific offering or a particular geographic location.
Vertiv CEO Albertazzi asserts, “During times of technological transformation, as the one underway now with AI, our customers lean on the knowledge and strength Vertiv can offer. Advanced technology, deep domain expertise, global scale, 24/7 local service globally, these are true differentiators we built over the decade serving the data center industry and understanding its truly unique requirements. And that’s not easy to replicate.”
Growth a positive for financials
For the first quarter of 2024, Vertiv reported that its sales were up 8%, compared to the 2023 first quarter, to $1.639 billion. It had a strong order position, with a book-to-bill ratio of 1.5 times (orders compared to fulfillments). Its operating profit was at $249 million for the period, up 42% from the 2023 first quarter, making for an operating profit margin of 15.2%. However, this was after making certain adjustments to account for outstanding stock warrants. Without this adjustment, operating profit for the period would be $202 million.
As of the first quarter, Vertiv’s current ratio was at 1.34, indicating that it has sufficient assets to cover its current liabilities. And it has an acceptable debt-to-equity ratio of 2.09. Its book value per share was at $3.72, making for a hefty price-to-book value of more than 23.
For the full 2024 year, management expects that sales will grow about 12%, with operating profit up to $1.35 billion as higher sales help better offset the company’s fixed costs. This will make for an operating profit margin of 17.7%. Vertiv is anticipating earnings per share of $2.32 for 2024, up about 30% from 2023, which makes for a price-to-earnings ratio of about 38.
The company has a stock repurchase program, enabling it to purchase up to $3 billion worth of its shares through 2027 (it repurchased $600 million of its shares in the first quarter) and this should provide some support for its shares. Vertiv also pays a $0.10 annual dividend per share.
Another AI play
While Vertiv is certainly high priced, the development of AI will also help power growth for the company. And the company’s experience and global reach in servicing data centers could also position it better than its competitors to take advantage of this opportunity. That’s why you could consider adding Vertiv to your portfolio if environmental concerns are not an issue for you.
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Note: I do not own any individual Vertiv stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.