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This AI Backbone Stock Should Win Big in the AI Build Out

Picking the winners in the AI race is not an easy task. There are few small companies that are pure AI plays, and the large companies like Microsoft and Alphabet that are big players in AI also have enormous non-AI related business. But, there are some almost “pure play” AI companies out there, and this one, Vertiv, doesn’t even have a horse in the AI technology race.

As 2023, the year of AI, comes to a close an abundance of questions remain around how companies will profit from the new technology. But, one thing is certain, AI is here to stay, and is growing at an incredibly rapid rate. You need look no further than any NVIDIA (NVDA) earnings report this year for confirmation. 

I’ve talked about several companies employing the new AI technology in a variety of ways. But, there are also non-technology centric (at least not AI focused technology) ways to get in on the AI boom, that should have long term legs regardless of how AI is eventually employed. And one backdoor play in the world of AI is Vertiv Holdings (VRT).

Vertiv (VRT) had its beginnings as one of the much maligned, and mostly deserved, SPACs (Special Purpose Acquisition Companies) of the late 2019s and early 2020s. The company came public via a merger with a SPAC headed by Dave Cote, former CEO and renowned leader of Honeywell (HON). Cote still serves as Chairman of the Board at Vertiv.

Vertiv, like NVIDIA, could be a stock defined by the phrase, being at the right place at the right time. That’s because Vertiv provides one of the essential elements in the AI equation, just like NVIDIA. While NVIDIA has made a killing off of AI chips, Vertiv is making a killing providing infrastructure for the data centers which house all of those expensive AI chips. 

Vertiv makes racks, power connectors, power management systems, thermal control and cooling systems, and basically any and all of the products that support the infrastructure in a data center. They have been a huge beneficiary of the data center boom that is being driven by the need to build out massive data centers that can handle the demand for AI driven computing power. 

And their earnings reflect the rapid ramping up of demand this year. Vertiv recently reported net sales that were 18% higher in the quarter YoY, an 11% rise in orders. They also added a record high backlog of $5.0 billion. And, they’ve handled the influx of orders, which might compress margins for many companies, by increasing operating margins almost 8% to 17% in the quarter.

Vertiv also raised guidance in the recent report, predicting free cash flow of $600 to $650 million for the full year. This is huge for a smaller company not to need to raise additional capital in what is still a relatively high interest rate environment compared to when the company went public in 2019.

Addressing where we are in the AI lifecycle, CEO Giordano Albertazzi, made it very clear, “We are still in the early stages, but the industry is gearing up to deploy the data center infrastructure needed to meet the compute capacity that AI is demanding.” 

One of the difficulties in AI investing is that there are few pure AI plays available to investors. And while Vertiv is not a pure AI play, as an AI infrastructure play it’s pretty close. Albertazzi emphasized this in the earnings release, stating, “As the only pure-play data center infrastructure company able to deliver across the entire spectrum of thermal and power technologies, Vertiv is uniquely positioned to partner with our customers to meet their data center needs for the present and the future.”

Vertiv has an overall B rating in our POWR Ratings. The company outscores 85.55% of the stocks we track. On the two most relevant scores to the Vertiv AI story, the company has a score of 98.99% in the Growth component and a 97.32% rating in the Sentiment component…both right in line with the AI growth story.

Vertiv is a great way to play AI without actually having to pick a winning technology company. There is one thing that everyone agrees with, that the demand for AI is on a steep upward trajectory…and meeting this demand will without a doubt require additional product and services from Vertiv.

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VRT shares were trading at $48.69 per share on Tuesday afternoon, up $0.89 (+1.86%). Year-to-date, VRT has gained 256.64%, versus a 25.29% rise in the benchmark S&P 500 index during the same period.



About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.

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