The artificial intelligence craze has driven Nvidia Corp. to a $2.3 trillion market value from about $360 billion at the beginning of last year, which means the chipmaker is trading at a price that’s 75 times higher than earnings. It is also taking some industrial companies along for the ride with a lot of room to run.
Astute investors figured out that the huge demand for everything AI will require the handling of an unimaginable amount of data that will be stored and processed at data centers. This is where the opportunities for industrials come into play. Every company that supplies something — anything — for data centers is riding the coattails of Nvidia and is being scooped up by investors.
An eclectic number of industrial companies have their fingers in the data-center pie — from Caterpillar Inc., which provides generators in case the power goes out, to Trane Technologies Plc, which makes the chillers that cool computer servers. Eaton Corp. makes all kinds of power-supply gear, and American Towers Inc. is building the complex data facilities after acquiring CoreSite in late 2021.
Caterpillar is up 24% this year through March, more than double the S&P 500 Index. Eaton jumped 30%, and Trane climbed 23%. That’s solid growth but only a bump compared with the mountain that Nvidia has scaled. That’s because the data-center play is only a small portion of these companies. Caterpillar, whose main business is making backhoes and bulldozers, had $67 billion of sales, and diesel generators for data centers is likely a tiny number. American Tower, which is being dragged down by slower investment in 5G wireless deployment, fell more than 8% this year even though CoreSite reported a second year of record data-center sales in 2023.
The takeaway is that the purer the play on data centers, the more Nvidia-like the stock gain. That’s the case for Vertiv Holdings Co., arguably the hottest stock among the industrials that were smart enough (or lucky enough) to be tied to the data-center boom. Vertiv, which supplies equipment to data centers, has soared 70% this year, and that’s on top of a 252% gain last year.
The company is trading at 66 times earnings. That’s in the nose-bleed section for an industrial stock and towers over current industrial darlings such as Trane and Eaton, which have price-earnings ratios of 34 and 36 times earnings. This begs the question of whether Vertiv and the data-center construction spree have legs. The answers all point to yes.
The first thing to keep in mind is that the explosion of data and the ways to mine it for value are only starting. Dave Cote, the chairman of Vertiv, says the digital age started about three to four decades ago and, if it follows a pattern similar to the industrial age, will likely last at least a century. The gold rush for Graphic Processing Unit chips, or GPUs, has only begun as companies investigate how AI can bolster productivity.
“Everybody’s trying to figure out what exactly does an AI data center look like and how do you use new technologies to cool these AI chips,’’ Cote, who turned around a once-flailing Honeywell International Inc. during his 15-year stint as chief executive officer, said in an interview.
Global data-center power needs are expected to double between this year and 2030, according to Wolfe Research. Vertiv set annual sales growth targets of 8% to 11% over five years, which Wolfe says “lean low” and will likely be in the mid-teens. Vertiv’s adjusted operating margins are at 15% now, and the company expects those to rise to 20% or more in the next two to four years.
Read the full article here by Thomas Black of Bloomberg News, Advisor Perspectives
