Amid sustained investor enthusiasm for artificial intelligence (AI) infrastructure, shares of Vertiv Holdings LLC (VRT.US), a leading U.S. player in liquid cooling technology, reached a record high during Wednesday's trading session, bolstered by an optimistic outlook from HSBC Holdings PLC. HSBC initiated coverage on Vertiv with a "Buy" rating and a $325 price target, suggesting an upside potential of nearly 18% from the stock's closing price of $276.16 on Wednesday. The bank identified Vertiv as a "pure-play contender" in the data center power and cooling sector, positioning it at the center of the fastest-growing segment within the AI supply chain.
A surge in AI capital expenditure is expected to drive significant demand for equipment. HSBC forecasts a substantial acceleration in capital spending by hyperscale cloud service providers, projecting that U.S. cloud computing capital expenditures will grow by approximately 91% by 2026, fueled by AI. This spending surge is anticipated to directly translate into increased demand for infrastructure equipment, particularly in power management and cooling systems. Analysts estimate the total addressable market for power and cooling equipment will reach about $156 billion by 2026, representing a year-on-year increase of roughly 67%. This reflects both heightened computing intensity and increased complexity in data center design.
Vertiv holds an advantageous position as an integrated supplier. HSBC expressed a favorable view of vertically integrated suppliers, identifying Vertiv, Eaton (ETN.US), and Schneider Electric as best positioned to capture growth opportunities from evolving data center architectures. Vertiv is particularly distinguished by its extensive capabilities across both power systems and thermal management systems. According to HSBC's supply chain analysis, approximately 80% of the company's revenue is derived from data center-related business, one of the highest proportions among its peers. This positioning enables Vertiv to participate in multiple critical phases of data center construction, from uninterruptible power supply systems to cooling technologies.
Strong demand is evidenced by robust order growth and a growing backlog. The report highlighted Vertiv's recent strong business momentum. The company's fourth-quarter orders increased by 252% year-over-year, while its backlog grew by more than 50% sequentially. HSBC indicated these trends reflect the scale and urgency of procurement by hyperscale cloud providers, with customers accelerating deployment schedules to support AI workloads.
The industry is transitioning towards higher power densities and liquid cooling technology. HSBC anticipates the next phase of data center evolution will require significantly higher power density, with rack power demands expected to rise from the current approximately 10 kilowatts to around 1 megawatt needed for next-generation chips. This shift is accelerating the adoption of liquid cooling. HSBC views this as the fastest-growing segment within thermal management and expects the proportion of spending on cooling solutions within overall infrastructure expenditure to continue increasing. Vertiv has expanded its capabilities in this area through acquisitions, including the purchase of liquid cooling specialist CoolTera, enabling it to benefit from this transformational trend.
Long-term changes in technical architecture present additional opportunities. HSBC also noted that long-term evolution in power architecture will create opportunities, including a potential future transition to 800-volt direct current systems. Although this shift remains in its early stages, it could reshape the competitive landscape and benefit suppliers with expertise across multiple voltage levels and system components. Concurrently, grid infrastructure bottlenecks and long lead times for high-voltage equipment are reinforcing demand for integrated solutions, including on-site power generation and advanced power distribution systems.
While Vertiv's valuation already reflects growth expectations, further upside potential is seen. Vertiv trades at a higher valuation than many industrial peers, reflecting its exposure to high-growth end markets. HSBC estimates the company's valuation at approximately 28.6 times the projected 2026 enterprise value to EBITDA (EV/EBITDA) multiple and around 40 times forward price-to-earnings. Nevertheless, the institution believes the growth outlook sufficiently supports this valuation level, pointing to strong return metrics and sustained, clear demand visibility.
Structural demand trends underpin the future outlook. In summary, HSBC believes the AI infrastructure cycle is still in its early stages, with current spending constrained more by execution capacity than by demand. As global data center construction accelerates and workloads continue to expand, key suppliers of power and cooling equipment are expected to see persistent order growth. Within this group, Vertiv, with its highly focused business structure and integrated product capabilities, is poised to be a significant beneficiary of this trend.
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