To The Moon

$Vertiv Holdings LLC(VRT)$

Earning Overview

Let’s start with Vertiv's quarterly revenue growth. The company saw a solid 26% revenue growth in the most recent quarter. While their revenue has fluctuated, the management has forecasted revenue for 2025 to be approximately $9.2 billion, with adjusted earnings per share (EPS) around $3.55. This would represent a strong improvement from 2024, where revenue was $8 billion and adjusted EPS was $2.85. The management team is projecting over 10% revenue growth and 10%+ EPS growth in 2025, with potential for 20-30% EPS growth. However, investors are more concerned about the longer term—specifically 2026 and beyond.

Fundamental Analysis

Revenue and Growth Prospects Vertiv’s revenue growth has been solid, driven by the increasing demand for infrastructure solutions tailored to AI-optimized data centers. The company has reported impressive revenue growth in recent quarters, including a 26% growth in the most recent quarter. For 2025, management forecasts revenue of around $9.2 billion, a notable increase from $8 billion in 2024. The company is also projecting adjusted earnings per share (EPS) to grow by over 10%, with some estimates pointing toward 20-30% growth in EPS for 2025. This shows that Vertiv is capitalizing on the growing demand for AI-related infrastructure.

However, there is a level of uncertainty beyond 2025, as forecasts from large tech companies—key customers for Vertiv—are less clear for the following years, especially as those companies face pressure to manage capital expenditures and demonstrate stronger returns on investment in AI infrastructure.

Profitability and Margins Vertiv operates in a capital-intensive industry, with its traditional infrastructure solutions often offering lower margins compared to service-based offerings. The company is, however, focusing more on higher-margin services, which should help improve overall profitability. The company’s cash flow from operations has been volatile, but it has shown an upward trend, reaching 16.5% recently, up from 5% in 2021. This improvement indicates better operational efficiency and stronger cash flow generation.

Despite this, Vertiv’s profitability could face pressure if it doesn’t maintain its margin expansion strategy or if competition in the data center space intensifies. Additionally, supply chain disruptions or increased raw material costs could negatively impact margins.

Debt and Financial Health Vertiv is generally considered to have a manageable level of debt, which is typical for companies in the capital-intensive infrastructure space. The company’s focus on improving its return on capital and cash flow should help in servicing its debt while maintaining flexibility for future growth initiatives. However, any significant downturn in demand or prolonged economic slowdown could put pressure on its ability to service debt and limit its financial flexibility.

Guidance

Concerns About Long-Term Growth Beyond 2025 Why? We've already seen projections from major customers in the data center segment for 2025, such as Amazon, Meta Platforms, Alphabet, and Microsoft, who have all indicated a significant increase in spending. But the uncertainty begins in 2026 and beyond. These big tech companies are facing pressure from investors questioning whether their huge infrastructure investments for AI are yielding sufficient returns. If they scale back spending, it will impact companies like Vertiv, Nvidia, Super Micro Computer, Dell Technologies, and the entire ecosystem that's been benefiting from the AI boom, particularly since the launch of ChatGPT in late 2022.

there was a significant development regarding Vertiv Holdings. The most notable change was the downward revision of free cash flow forecasts by Wall Street analysts for the period between 2025 and 2029. This adjustment is largely in response to the reduced spending expectations from large tech companies, as mentioned earlier. This shift in outlook has affected Vertiv's financial projections, leading to lower forecasts for the company.

Free Cash Flow

Vertiv’s cash flow from operations has been volatile but trending upward, reaching 16.5% in recent reports, up from just 5% in 2021. This is a capital-intensive business, although the company is focusing more on its service solutions, which offer higher margins compared to its infrastructure solutions. As is the case in most businesses, services are more profitable than hardware or infrastructure. Despite some volatility, returns on investor capital have shown an upward trend, currently at 10.39%, up from a negative 9-10% in 2021. This positive trend could continue, as management is forecasting over $1 billion in revenue growth for 2025, with adjusted EPS growth likely to be even higher.

Risks and Challenges

Reduced Spending from Major Tech Companies One of the primary risks Vertiv faces is the potential for reduced spending by its largest clients, including tech giants like Amazon, Microsoft, Alphabet, and Meta. These companies have been significant drivers of demand for data centers optimized for AI. However, recent trends indicate that these companies are facing pressure from investors to reduce infrastructure spending, particularly in the wake of uncertain economic conditions and the question of AI's return on investment. A slowdown in capital expenditures from these companies would directly impact Vertiv’s revenue and growth prospects.

Market Volatility and Economic Uncertainty The overall market volatility and macroeconomic uncertainty pose a risk to Vertiv. In periods of economic instability, companies tend to scale back their investments in new infrastructure, which could impact demand for Vertiv’s products and services. This risk is exacerbated by the cyclical nature of the tech and data center industries, which can experience fluctuations in demand depending on broader market conditions.

Intense Competition Vertiv operates in a highly competitive space with numerous players providing similar infrastructure solutions, including Nvidia, Dell Technologies, Super Micro Computer, and others. As the demand for AI-optimized data centers grows, more companies may enter the market, increasing competition and potentially driving down margins. Vertiv will need to continue innovating and differentiating its offerings to maintain its market share.

Supply Chain Disruptions As with many companies in the tech and manufacturing sectors, Vertiv is vulnerable to supply chain disruptions, particularly in critical components like semiconductors and cooling systems. Any delays or price increases in these components can affect Vertiv’s ability to deliver products on time and could lead to increased costs or lower margins. Geopolitical factors and global trade tensions could also further exacerbate these risks.

Technological Shifts While Vertiv’s products are essential to the current generation of data centers, rapid advancements in technology, particularly in AI, could present risks. For example, changes in data center architecture or the development of new, more efficient cooling and power solutions could make Vertiv’s offerings less relevant or obsolete. The company needs to keep pace with technological innovation to remain competitive and meet evolving customer needs.

Valuation

I’ve updated my discounted cash flow model for Vertiv, and will now evaluate the stock’s potential based on these new projections.

Impact on Discounted Cash Flow Valuation As a result, I updated my discounted cash flow (DCF) valuation model to incorporate these lowered forecasts. Previously, I had calculated Vertiv's intrinsic value per share to be over $100, but following this update, the intrinsic value has been adjusted to $85 per share. Although this is a decrease, it still remains above the current market price. I want to remind my viewers that DCF is just one aspect of my investment framework for determining whether a stock is a buy, hold, or sell. As I outline in my book, The Six-Step Investment Framework, valuation is only one part of the decision-making process.

Valuation Framework and Context It's important to understand that DCF is just one form of valuation. Another key approach I use is price multiples, specifically the forward price-to-earnings ratio. At 19, Vertiv appears undervalued when compared to the market, its forecasts, and industry trends. While I wouldn't call it "very cheap," it definitely looks like a solid value relative to its growth prospects. The increasing demand for AI-optimized data centers is a trend I’m bullish on, as AI is already proving its value to businesses, and we're still early in the overall AI industry's growth trajectory.

Market sentiment

The market sentiment surrounding Vertiv is currently mixed, influenced by a combination of factors such as industry-wide trends, reduced forecasts for tech company spending, and the company's own financial outlook. On one hand, Vertiv is well-positioned within a growing industry, particularly in AI-optimized data centers, which are in high demand due to the significant power and cooling needs associated with AI technologies. As AI continues to expand, the need for infrastructure solutions like those offered by Vertiv remains strong, leading to a generally optimistic long-term view.

However, short-term concerns have emerged due to recent downgrades in free cash flow forecasts from Wall Street analysts. This revision is a direct response to lower spending expectations from major tech companies such as Amazon, Microsoft, and Alphabet, which are vital customers for Vertiv. These companies have faced pressure from investors to reduce infrastructure expenditures, and this cautious stance has trickled down to impact the entire digital infrastructure ecosystem, including Vertiv.

The market has responded by lowering expectations, resulting in a pullback in Vertiv’s stock price despite the company's strong position in its sector. While analysts have downgraded earnings projections for the next few years, the stock's valuation still appears relatively favorable when using price multiples, with a forward price-to-earnings ratio suggesting it’s undervalued compared to its growth prospects.

Overall, while there is some concern about short-term growth due to the reduced spending from major clients, the long-term market sentiment remains positive, especially given the growing importance of AI and the need for data center solutions. Vertiv’s prospects still look strong, though caution is warranted as it navigates this period of uncertainty in the tech sector.

Conclusion

When evaluating Vertiv using multiple valuation methods, it appears to be fairly valued based on discounted cash flow and undervalued when considering price multiples. Taking everything into account, I have updated my recommendation for Vertiv stock to a "buy" and continue to hold this view moving forward.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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