The explosive growth of artificial intelligence (AI) is driving an unprecedented boom in the data center industry. This surge, however, presents a critical challenge: managing the immense heat generated by powerful AI processors. As a result, investors are flocking to companies specializing in advanced data center cooling solutions, particularly those focused on liquid cooling, a technology exponentially more efficient than traditional air cooling methods. This article examines the remarkable performance of three leading players—nVent Electric, Vertiv, and Modine Manufacturing—and analyzes their potential for continued growth in this burgeoning market.
Key Takeaways:
- The AI boom is fueling a 15% annual growth rate in the data center market, driving the need for more efficient cooling solutions.
- Liquid cooling, 25 times more effective than air cooling, is becoming the industry standard for AI data centers.
- nVent Electric, a pioneer in liquid cooling, boasts strong partnerships with hyperscale players and a 40%+ annual growth rate in its liquid cooling segment.
- Vertiv, a major player with a 75% revenue exposure to data centers, is projecting a 20% compound annual growth rate (CAGR) in data center revenue over the next four years.
- Modine Manufacturing, a newcomer to the market, is experiencing rapid growth, with a forecasted 18-22% CAGR in its climate solutions segment, thanks to strategic acquisitions and partnerships.
The Heat is On: The AI-Fueled Data Center Cooling Revolution
The current AI revolution is pushing data centers beyond the limitations of traditional air cooling. Advanced AI models, trained on powerful chips like Nvidia’s GPUs, significantly increase energy consumption and heat generation. “The reality is data centers cannot run AI processing in any capacity without using liquid cooling,” asserts Dean Dray, an analyst at RBC Capital Markets. This statement highlights the critical shift underway in the industry, forcing data center operators to adopt more efficient cooling technologies.
While air cooling remains relevant and is expected to be used in a hybrid approach alongside liquid cooling, liquid cooling’s 25x advantage in efficiency is undeniable. This technology directly removes heat at the source using a liquid coolant, ensuring optimal server performance and preventing costly equipment damage. This technological leap isn’t merely an incremental improvement; it’s a fundamental change in how data centers operate.
nVent Electric: A Pioneer’s Dominance
nVent Electric stands out as a true pioneer in liquid cooling technology, having developed and refined its solutions for over a decade. Initially conceived for high-end mechanical equipment, nVent’s innovation found a perfect application in data center cooling, solving a crucial problem that legacy air conditioning systems could no longer address. “They invented the liquid cooling business,” according to Dean Dray, emphasizing nVent’s foundational role in the industry.
nVent’s success stems from its deep-rooted partnerships with major hyperscale players; they are actively involved in designing and testing thermal solutions for each generation of CPUs and GPUs. While the company is understandably cautious about divulging specific details regarding these partnerships, their existence underpins nVent’s critical role in the market. Analyst Brian Drab of William Blair notes the company’s excellent position, with its coolant distribution unit (CDU) representing the “brains” of liquid cooling systems. This CDU dynamically adjusts the liquid coolant flow to individual chips, ensuring optimal cooling across thousands of components within a data center.
nVent presently enjoys a 23% total revenue exposure to the data center market. Significantly, half of this revenue (approximately 11.5%) comes from the rapidly growing liquid cooling segment, demonstrating impressive growth, projected at more than 40% annually. With an outperform rating and a $80 price target from analyst Drab at William Blair, nVent appears well-poised for continued success. The company’s history and relationships in the industry represent significant intangible assets.
Vertiv: Scaling Liquid Cooling Through Acquisition
Unlike nVent, Vertiv represents a legacy air-cooling company that has strategically entered the liquid cooling market through acquisitions. The acquisition of CoolTerra in December 2023 marked Vertiv’s commitment to this crucial segment. This move signals a significant shift from a predominantly air-cooling-based operation towards embracing the technological advancement necessary to compete in the rapidly changing AI data center landscape. The substantial shift of Vertiv into this market is reflected in their current financial outlook.
With a remarkable 75% of its revenue tied to the data center market, Vertiv is deeply invested in the industry’s success. Analyst Saree Boroditsky of Jefferies estimates a robust 20% CAGR for Vertiv’s data center revenue over the next four years – exceeding the company’s own projections. This optimistic outlook is further validated by Vertiv’s strong order backlog, potentially resulting in upside to current financial forecasts. Boroditsky’s initiation of coverage with a buy recommendation and a $125 price target underscores Vertiv’s promising future prospects.
Furthermore, Vertiv’s considerable $5 billion balance sheet capacity offers additional upside potential. This financial strength positions the company to pursue further acquisitions or engage in share buybacks, providing enhanced value for investors. This financial flexibility puts Vertiv in a strong competitive position to respond to industry needs and opportunities.
Modine Manufacturing: A Rapid Rise in the Liquid Cooling Arena
Modine Manufacturing, initially focused on air cooling, is another prominent player rapidly making inroads into the liquid cooling market. Through strategic acquisitions, notably TMG Core (for liquid cooling intellectual property) and Scotts Springfield Manufacturing (for air handling units), Modine is swiftly expanding its capabilities and portfolio. These moves demonstrate a conscious effort to accelerate its foray into this high-growth sector. This strategy has proven significantly effective to date.
Modine’s data center business is set to achieve approximately 50% growth in 2024, showcasing a rapid ascent in this new market segment. During its investor day on September 11th, Modine projected a strong 18-22% CAGR through fiscal year 2027 in its climate solutions segment (which houses the data center division), exceeding previous targets significantly. This substantial upward revision emphasizes the company’s confidence in its growth trajectory.
The success of Modine’s strategic push into the liquid cooling market is partly due to the development of new partnerships with significant hyperscale customers – recently signing its third major contract. “Being able to continue to penetrate these AI pioneers is absolutely going to be key for Modine to maintain market growth on an organic basis,” highlights Matt Summerville, an analyst at D.A. Davidson. Future growth is expected from expansion into the rapidly developing Asia-Pacific market. The planned market release of Modine’s CDU by March 2025 is also expected to be a significant catalyst for growth.
Summerville’s updated buy rating and price target of $155, representing a 15% upside from the Friday closing price, demonstrate his positive view of Modine’s future growth potential. Its combination of strategic acquisitions and organic growth demonstrates its capacity to become a significant player in the industry.
