One of the hottest themes pushing the S&P 500 and Nasdaq Composite to new heights is artificial intelligence (AI). Applications from ChatGPT and competing platforms have taken the world by storm, and the momentum doesn't appear to be slowing down.
Like all emerging growth trends, there are loads of opportunities to invest in artificial intelligence (AI). One of the bigger areas in the AI realm is data centers.
While Nvidia, Advanced Micro Devices, Intel and other leading chip companies fuel demand for data center services, there's another opportunity that's caught my attention. Vertiv Holdings (VRT 1.75%) is an emerging player developing infrastructure for data centers. Let's dive into how Vertiv is benefiting from the AI boom and assess if now is a good opportunity to scoop up some shares.
A $438 billion opportunity
According to Statista, the total addressable market for data centers will be $438 billion by 2028. This forecast includes several aspects related to data centers, including IT architecture solutions such as storage clusters and server racks, as well as network infrastructure.
One of the biggest factors impacting data centers right now is how much energy these facilities consume. Vertiv is unique because it specializes in heat collection and liquid cooling for both indoors on server racks and outside of data center complexes.
Image source: Getty Images.
How is Vertiv performing?
The table illustrates Vertiv's operating performance in 2023.
| Category | 2023 | 2022 | % Change |
|---|---|---|---|
| Revenue | $6.9 billion | $5.7 billion | 21% |
| Free cash flow | $778 million | ($260 million) | N/A |
Data Source: Vertiv investor relations. Table by author.
Breaking down Vertiv's revenue growth into a bit more detail, investors will see that the company is firing on all cylinders.
For the year ended Dec. 31, Vertiv increased sales in critical infrastructure and solutions by 28%, integrated rack solutions by 12%, and other services by 7.5%. The company's acceleration in infrastructure service and rack solutions are particularly encouraging.
Moreover, Vertiv ended the fourth quarter with 23% growth in its backlog -- which reached a record $5.5 billion.
Is now a good time to buy Vertiv stock?
About a month ago, Vertiv released some interesting news to investors: The company was selected to join Nvidia's partner network. Vertiv joins other data center solutions providers working with Nvidia to "offer its expertise in addressing the unique infrastructure challenges presented by accelerated computing."
While this is not a reason to buy Vertiv stock, I see the partnership as a unique source of future lead generation. Considering Nvidia's data center business grew 217% year over year in 2023, I think Vertiv's relationship with the chipmaker could prove to be lucrative in the long run as the secular AI narrative continues to evolve.
All this said, one important item to point out with Vertiv is its valuation. Excitement around AI has undoubtedly pushed the capital markets to new highs over the last year. While big tech has been the primary beneficiary, broader momentum has reached tangential players.
Shares of Vertiv have rocketed 545% over the last year, and as a result the stock has become a bit pricey. Vertiv's forward price-to-earnings (P/E) ratio of 35 is well above that of the S&P 500, which boasts a forward P/E of about 21.
Nevertheless, I still see Vertiv as a good opportunity right now. When it comes to investing in AI, I think opportunities in data centers are still generally treading under the radar.
The combination of strong top-line growth plus a robust pipeline of new business yet to be recognized makes Vertiv a compelling opportunity in the red-hot data center space.
