As artificial intelligence (AI) is rapidly installed in big-tech data centers, the investment community is starting to worry about a new set of related issues: increased energy consumption. The semiconductor systems used to power AI, such as those of Nvidia — consume large amounts of energy, so much so that expectations for global energy demand are rising rapidly.
Nvidia isn’t worried. It has an ecosystem of technical partners working hard to solve energy delivery and other related data center issues. One of those partners that received a name change from CEO Jensen Huang earlier in 2024 is Vertiv Holdings (NYSE: VRT). The stock could be a buy, if the price was right.
Vertiv holds a key position in technical data centers
Until recently, Vertiv was a pretty boring industrial energy technology company. It has been split from Emerson Electric and sold to private equity in 2016. In 2020, the name was changed to Vertiv and the company was taken public through a special purpose acquisition company (SPAC).
After that, the shares didn’t do much to write home about — at least not until 2023, when investors got wind of Vertiv’s potential in data center applications. And then in March 2024, during Nvidia’s annual weeklong GPU technology conference, it was announced that Vertiv was joining the Nvidia Partner Network. That relationship really electrified the stock price.
Speaking of electrification, Vertiv designs and manufactures power delivery and management systems for data center servers (the computing units that sit in pull-out drawers in data center racks).
As with all electrical systems, more power consumption means more heat, a harmful side effect of powerful new AI servers. Vertiv also designs the cooling systems. The addition of Nvidia as one of Nvidia’s key advisors in power and cooling systems naturally creates high optimism among investors, given the speed at which Nvidia is growing.
Vertiv itself seems more than happy to tout its integration into Nvidia’s ecosystem. With AI revolutionizing the way data centers are managed, the company believes it has a new growth tailwind. Management said the backlog of equipment and service orders increased 15% to $6.3 billion in just three months from the end of 2023 to the end of the first quarter of 2024.
A valuable chain partner, but how valuable?
Vertiv’s stock progress has been impressive to watch, but I fear its valuation now exceeds current reality. With a market cap of over $36 billion after the recent run-up, the stock is valued at nearly 40 times expected 2024 earnings per share (EPS).
To be clear, this isn’t the most egregious valuation being debated in the AI investment frenzy. However, Vertiv expects organic revenue growth (excluding acquisitions and divestitures) to increase by approximately 12% this year.
The growth resulting from the AI boom in data centers appears to be already priced in, unless management seriously underestimates actual revenue. Perhaps some of that $6.3 billion backlog will turn into revenue sooner or later.
Right now, Vertiv is indeed an interesting company that could be a winner of the AI race in the long run. It seems to have carved out a position for itself in the data center supply chain, and especially for AI powered by Nvidia. Perhaps Vertiv’s growth story will last longer than just the recent hype.
But for an equipment engineer whose fate as a premium-priced stock largely depends on Nvidia’s innovation, the current valuation is a bit high for my taste. Not only will Vertiv need to grow, but its profit margins (operating margin of 14% over the last twelve months) will also need to grow to justify the rise in share prices.
For now, Vertiv is on my watchlist, but that’s it. If share prices cool off a bit, this could be worth revisiting.
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Nicholas Rossolillo holds positions at Nvidia. The Motley Fool holds positions in and recommends Emerson Electric and Nvidia. The Motley Fool has a disclosure policy.
1 Hot Data Center Stocks to Buy — If It Ever Cools Off was originally published by The Motley Fool
