1 Hot Data Center Stock to Buy – When It Cools

As artificial intelligence (AI) is being deployed at a rapid pace in big tech data centers, the investment community is starting to fret over a new, related issue: increased energy consumption. Semiconductor systems used to drive AI nvidia — Expectations for global electricity demand are rising rapidly, consuming vast amounts of energy.

NVIDIA isn’t worried. We have an ecosystem of engineering partners working hard to solve energy delivery and other related data center challenges. One of the partners named after CEO Jensen Huang in early 2024 is: Vertiv Holdings (VRT -0.36%). You can buy stocks as long as the price is right.

Vertiv has a key position in engineering data centers.

Until recently, Vertiv was a very boring industrial energy engineering business. It was separated from . emerson electric It was later sold to a private equity fund in 2016. Afterwards, the name was changed to Vertiv in 2020, and the company was listed through a special purpose acquisition company (SPAC).

After that, the stock didn’t gain much attention, at least until 2023, when investors began to realize Vertiv’s potential in data center applications. And in March 2024, at Nvidia’s annual GPU Technology Conference, it was announced that Vertiv would be joining the Nvidia Partner Network. That relationship actually galvanized the stock price.

Data from YCharts.

When it comes to electrification, Vertiv designs and manufactures power supply and management systems for data center servers (computing devices that sit in pull-out drawers in data center racks).

As with all electrical systems, more energy use means more heat, a detrimental side effect of the powerful new AI servers. Vertiv also designs cooling systems. His addition as one of Nvidia’s key consultants in power and cooling systems clearly increases investor optimism given the pace of Nvidia’s growth.

Vertiv itself seems very excited to be integrated into the Nvidia ecosystem. The company sees a new wave of growth as AI fundamentally changes the way data centers operate. Management said its equipment and services order backlog increased 15% in just three months from the end of 2023 to the end of the first quarter of 2024 to $6.3 billion.

A valuable supply chain partner, but how much is it worth?

Vertiv’s share price growth is impressive, but there are concerns that its current valuation outpaces current reality. With a market cap of more than $36 billion after its recent rise, the stock is valued at nearly 40 times projected 2024 earnings per share (EPS).

To be clear, this isn’t the most outrageous assessment in the AI ​​investing frenzy. However, Vertiv expects organic revenue growth (excluding acquisitions and divestitures) to increase by about 12% this year.

The growth from the data center AI boom appears to already be priced in, unless management seriously underestimates actual revenues. Maybe some of that $6.3 billion balance could be converted into sales soon.

At this point, Vertiv is an interesting company that could be a long-term winner in the AI ​​race. It appears to have gained ground in the data center supply chain, particularly in the AI ​​space supported by Nvidia. Perhaps Vertiv’s growth story will outlast its recent hype.

But for an equipment engineer largely associated with Nvidia’s innovations and thus destined to be a premium priced stock, its current valuation is a bit steep for my taste. Vertiv doesn’t just need to grow, it also needs to expand its profit margins (operating margins were 14% over the last 12 months) to justify a higher share price.

Data from YCharts. TTM = Trailing 12 months.

As of now, Vertiv is on my watch list, but not much more. It may be worth revisiting once the stock cools off a bit.