Vertiv (NYSE:VRT) is a global provider of critical digital infrastructure. The company designs, manufactures, and services mission-critical infrastructure technologies for, among other things, data centers. This is a booming sector, and that’s reflected in the surging share price, up 422.7% in the past year. Still, with a price-to-earnings-to-growth (PEG) of just 0.74x (1.0x or less is generally seen as undervalued), I believe that Vertiv stock may keep rising. That’s why I’m bullish.
Vertiv Is a Well-Positioned AI Play
Vertiv has positioned itself as a key player in the artificial intelligence (AI) landscape by providing the essential infrastructure that supports AI technologies. As AI increasingly relies on robust data centers for processing vast amounts of data, Vertiv’s experience in data center construction, advanced power, cooling, and IT management solutions has become critical to the industry’s expansion.
AI creates huge workloads that demand high-performance computing environments that are both reliable and efficient. Vertiv has considerable experience serving the sector, and its prefabricated offerings allow it to respond quickly to surging demand. In the Q1 earnings call, Vertiv suggested the company’s exposure to the data center sector was around 75%, and around 20% of revenues come from telecoms.
In the Q1 earnings call, management also expressed its confidence in the continued growth of the AI sector. With the rise in high-density requirements for advanced AI chips, Vertiv is set to capitalize on the growing demand for liquid cooling solutions. The company’s expertise in efficient, high-performance cooling technologies positions it favorably to support the intensive cooling needs of AI-driven data centers.
While CEO Gio Albertazzi didn’t disclose the exact nature of its liquid cooling projects, he said the pipeline for AI-related projects had doubled in the two months to April. The company believes this is consistent with the “GPU (Graphics Processing Unit) roadmap,” whereby new data center infrastructure will need liquid cooling to ensure these high-powered chipsets can operate at optimum capacity. This will also demand a shift in powertrain and thermal chain infrastructure.
Can Vertiv Stock Really Push Higher?
As with many investments in the AI space, our assessment of the opportunity depends on our evaluation of the long-term growth potential of AI. Many analysts think AI is already overdone and valuations have extended too far. Others contend that the AI revolution has only just started, with some suggesting that AI kingpin Nvidia (NASDAQ:NVDA) could push as high as $5,000 a share — if there wasn’t a 10-for-1 share split coming up.
Personally, I’m bullish on AI and data centers. Forecasts suggest that data centers will consume 20% of the world’s energy supply by 2025, underscoring the sheer scale of the AI revolution and the infrastructure it demands.
This leads us to Vertiv’s valuation. The stock is currently trading at 53.6x non-GAAP earnings from the last 12 months and 44.6x non-GAAP forward earnings. Understandably, this puts the stock at a considerable premium to the industrials sector. However, with its exposure to the booming AI segment, analysts expect Vertiv’s earnings to grow at an impressive rate. According to analysts, earnings per share (EPS) could grow at 61% annually over the medium term — the next three to five years.
In turn, that would lead to a PEG ratio of 0.74x. This represents a discount versus the industrials sector and a discount to many of its peers in AI-related industries. However, it’s always worthwhile hypothesizing what would happen if Vertiv were unable to deliver the growth analysts believe it is capable of. At 44.6x forward earnings, the stock could be priced for perfection, and a steep decline in the share price may occur if it doesn’t match or beat expectations.
Is Vertiv Stock a Buy, According to Analysts?
On TipRanks, VRT comes in as a Strong Buy based on eight Buys, one Hold, and no Sell ratings assigned by analysts in the past three months. The average VRT stock price target is $100.11, implying 3% downside potential.
First, I think it’s important to address the implied downside suggested by the analysts’ forecasts. In many cases, especially with stocks that are growing quickly, analysts can struggle to keep pace with the stock. This lag can result in conservative estimates that may not fully capture the company’s potential. After all, analysts don’t update their positions consistently.
Moreover, analysts rely on historical data and current market conditions to make their projections, but fast-growing companies often outpace these metrics due to innovation, market expansion, or unforeseen opportunities. Vertiv’s optimistic guidance from the Q1 earnings call might not be reflected in these analysts’ forecasts.
The Bottom Line on Vertiv Stock
Personally, I’m bullish on Vertiv, but I accept that it may appear closer to fair value today than it has been for some time. If the company delivers on analysts’ expectations, then we may see further rapid growth in the share price. I’m also buoyed by the attractive, albeit forecast-dependent, PEG ratio.
