Following a 2016 spinoff of Emerson Electric's (EMR 1.35%) power unit and subsequent reverse merger with GS Acquisition Holdings Corp (GSAH.U +0.00%), Vertiv Holdings (VRT 4.55%) went public in the U.S. in February 2020. Vertiv is a data and IT company that primarily serves businesses across three end markets: data centers, communication networks, and commercial and industrial environments.
Despite challenges posed by rising inflation and a lagging global supply chain, the stock is up 43% year-to-date, handily topping the S&P 500 and its 25% gains so far. Can the market-beating gains continue? Let's dive in.
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What Vertiv does
Vertiv's offerings include power and thermal management products, integrated rack systems, modular solutions, and management systems for monitoring and controlling digital infrastructure. Additionally, Vertiv provides lifecycle management services, predictive analytics, and professional services for deploying and optimizing these products and their related systems.
Vertiv's end markets are experiencing unprecedented growth due to the boom in data. As the world becomes a more digitally connected place, the needs for services provided by Vertiv will continue to grow.
Financial performance
For the nine months ending September 2021, Vertiv generated $3.6 billion in revenue, which represents a 17% year-over-year increase. While the company's gross margin on services remained flat, product gross margins declined from 31% to 29% year-to-date. For this reason, Vertiv's blended gross margin saw a year-over year decline. According to Vertiv, the primary reasons for the deterioration in gross margin are related to inflation and supply chain headwinds. The company's material and freight costs have experienced inflation in the form of higher commodity prices, freight rates, as well as premiums paid for spot-buys and expedited shipments due to limited parts availability.
Vertiv is currently combating inflation and supply chain shortages in the U.S. and globally. Despite these challenges, Vertiv is still growing its top-line revenue while only experiencing margin fluctuations on the product side of its business.
The COVID-19 pandemic and its effects have certainly tested the company's business model. However, at the end of 2020, Vertiv's sales guidance for 2021 was $4.75 billion to $4.8 billion. As of Q3 2021, the company's revised guidance is $4.97 billion to $5.03 billion. Although these revised numbers include $55 million in estimated revenue impacts from its acquisition of E+I Engineering, if we back out the contribution of inorganic growth, the company's current revenue projection is well above its initial 2021 guidance of $4.8 billion. Vertiv's leadership has proven that it can navigate through uncertain times and still deliver for customers and shareholders.
Now what?
Vertiv has a relatively short history operating as a public company. The complexity of the reverse merger with GS Acquisition Holdings Corp. and the costs associated with it, as well as having to operate during a global pandemic and economic crisis for the majority of its life as a public company, make year-over-year comparisons difficult to gauge.
It is important to keep in mind that Vertiv has a large and growing total addressable market. Despite economic pressures brought on by the COVID-19 pandemic, inflation, and supply chain issues, the company's total addressable market is over $37 billion and expected to grow at a compound annual growth rate (CAGR) of 4% to 5% through 2025.
A big reason that I am so enthusiastic about Vertiv is that nearly all of its end markets are experiencing some level of growth, and each has a welcome lack of volatility. Although Vertiv's growth profile, therefore, may seem a bit muted compared to flashy growth stocks, its business is highly predictable, which gives me some comfort as an investor. Moreover, some of their end markets (such as cloud and hyperscale datacenters) are well-poised for their own growth as increased digitization, multiple device connection adoption, and Internet of Things (IoT) contribute as key drivers to the boom in data. All of those factors make Vertiv a solid play in a crowded field of tech stocks.
