Eric Isaacson
Vertiv Shares (New York Stock Exchange: VRT) remains one of the big AI winners that hasn't really seen much of a business benefit. The AI infrastructure company has reported massive order growth, but revenue isn't seeing a huge benefit. My investment thesis There remains a bearish sentiment on stocks after the recent big rally.
Source: Finviz
Orders on the rise
Vertiv has grown from $10 in 2022 to over $80 today due to increased orders. The company reported a massive 57% increase in organic orders in the second quarter, with total orders up 37% over the past 12 months.
Demand for AI-powered data centers is increasing, but Vertiv was only able to increase revenue guidance for the year by a minimum of $50 million. One of the main reasons for this is that orders have been prolonged and will now start to decline in the coming quarters.
The company reported that second quarter 2024 sales grew 14% to $1.95 billion, but the strong order growth continued for several years. Conference call on second quarter 2024 resultsThe CFO summed up the order growth as follows:
As a result, many of the orders are for future years and we are pleased with the outlook for 2025. Backlog, orders and order backlog are three positive aspects that point in the same direction and we like what we are seeing.
Vertiv expects sequential orders to decline in the third quarter, with 12-month order growth to remain around 30%. The real key is the lengthening of the order schedule, which the company has not confirmed through any metrics beyond not raising any revenue growth targets.
The data center infrastructure company benefits most from building new data centers related to power and cooling solutions, especially the heavy focus on liquid cooling technology. Nvidia (NVDA) reported 122% sales growth due to increasing demand for GPU data centers and Super micro (SMCI) forecasts sales will roughly double in the current fiscal year. Despite the issue with filing the 10-K on time, Vertiv is not benefiting in the same way from growth in demand for power and cooling sales, but not to the same extent as GPUs and servers.
Shares have risen on enthusiasm for AI and rising sales, which have boosted margins. Vertiv reported that operating margins rose 510 basis points to 19.6%. The company won't see the same margin growth going forward.
Vertiv expects third-quarter adjusted operating margins in the same range of 19.6% and annual margins of just 18.7%. The company may struggle to exceed margins above 20% in the future, with sales growth rates in the low double digits.
Too much hype about AI
Analyst consensus estimates call for sales to grow by only ~14% in 2025, after exceeding 12% in 2024. Targets are for only 11% growth in 2026, showing that strong order growth and rising demand for AI GPU chips are not driving massive growth for other Vertiv-supplied AI infrastructure.
Source: Seeking Alpha
The company is forecast to earn $2.50 per share this year, with earnings per share set to rise sharply next year to $3.23. The stock is trading at about 26 times 2025 earnings per share targets, though the large increase doesn't seem justified based on minimal growth rates.
Vertiv will need to generate operating margins of 20% in 2025 to generate the net income needed to produce earnings per share of $3.23. The market needs the company to hit this target to justify the current share price, let alone justify further increases.
The company's market capitalization has grown to over $31 billion, although it is only expected to generate free cash flow of $900 million this year. The company is certainly benefiting from the growing demand for AI, especially given the issues surrounding power consumption and the need to use cooling technology to reduce energy demand, but actual sales growth is not as impressive.
Carry
The main takeaway for investors is that Vertiv is not the best bet to take advantage of the AI boom. The company does not seem to have the capacity for substantial growth, with double-digit growth rates expected despite rising orders and demand.
Investors should take advantage of the recent rally to dump stocks, as the market appears to have gotten excited again about strong order growth without a clear understanding that these orders are multi-year and not a sign of accelerating growth rates.