1 Hot Data Center Stock to Buy — If It Ever Cools Off

1 Hot Data Center Stock to Buy — If It Ever Cools Off

With the rapid installation of artificial intelligence (AI) in big-tech data centers, the investment world has begun to worry about a new set of related problems: higher energy consumption . Semiconductor systems used to power AI, such as those in Nvidia — consume large amounts of energy, so much so that expectations for global electricity demand are rising rapidly.

Nvidia is not worried. It has an ecosystem of engineering partners who work hard to solve power supply and other data center issues. One such partner that got CEO Jensen Huang’s name earlier in 2024 is Vertiv Holdings (NYSE:VRT). The stock could be a buy, if only the price was right.

Vertiv holds a key position in data center engineering

Until recently, Vertiv was a pretty boring industrial energy engineering company. It comes from Emerson Electric and sold to private equity in 2016. Then in 2020, the name was changed to Vertiv and the company went public via a special purpose acquisition company (PSPC).

Afterward, the stock didn’t do much — at least, not until 2023, when investors began to realize Vertiv’s potential in data center applications. And then, in March 2024, during Nvidia’s annual week-long GPU technology conference, it was announced that Vertiv was entering the Nvidia Partner Network. This relationship really electrified the stock price.

1 Hot Data Center Stock to Buy — If It Ever Cools Off

VRT Chart

Speaking of electrification, Vertiv designs and manufactures power distribution and management systems for data center servers (the computing units placed in slide-out drawers in data center racks).

As with all electrical systems, increased power consumption means more heat, a harmful side effect of powerful new AI servers. Vertiv also designs the cooling systems. Being added as one of Nvidia’s primary power and cooling system consultants obviously sparks investor optimism, given how quickly Nvidia is growing.

Vertiv itself seems more than happy to tout its integration into Nvidia’s ecosystem. As AI radically changes the way data centers are operated, the company believes it can benefit from a new wind of growth. Management said its equipment and services backlog increased 15% to $6.3 billion over just a three-month period between the end of 2023 and the end of the first quarter of 2024.

A valuable partner in the supply chain, but what value?

The rise in Vertiv’s stock is impressive to see, but I fear the valuation now exceeds current reality. With a market capitalization of over $36 billion after the recent surge, the stock is valued at nearly $40 billion. times expected earnings per share for 2024 (EPS).

To be clear, this is not the most egregious valuation discussed in the AI ​​investing fervor. However, Vertiv expects organic revenue growth (excluding acquisitions and divestitures) to increase about 12% this year.

Growth from the data center AI boom already appears to be priced in, unless management is seriously underestimating actual revenues. Perhaps some of that $6.3 billion backlog will turn into sales sooner rather than later.

At this point, Vertiv is indeed an interesting company that could be a long-term winner in the AI ​​race. It appears to have secured a position in the data center supply chain, and particularly for Nvidia-powered AI. Perhaps Vertiv’s growth story will last longer than the recent hype.

But for an equipment engineer whose destiny as a high-end stock is largely tied to Nvidia’s innovation, the current valuation is a little high for my tastes. Vertiv will not only need to grow, but its profit margins (14% operating margin over the trailing 12 months) will also need to increase to justify the rising inventory.

VRT Operating Margin (TTM) ChartVRT Operating Margin (TTM) Chart

VRT Operating Margin (TTM) Chart

For now, Vertiv is on my watch list, but nothing more. If shares cool down a bit, this one might be worth revisiting.

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Nicolas Rossolillo has positions at Nvidia. The Motley Fool ranks and recommends Emerson Electric and Nvidia. The Motley Fool has a disclosure policy.

1 Hot Data Center Stock to Buy – If It Ever Cools Down was originally published by The Motley Fool

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