The artificial intelligence (AI) data center investing theme has been on fire over the last year. That said, valuations still matter, and investors need to consider what they are buying when they invest in data center infrastructure companies like Vertiv (VRT +0.48%).
Vertiv's growth keeps exceeding expectations
I last discussed the data center power and thermal management technology stock in mid-January, and it is up 52% since then, up 62% in 2026, and up 185% over the last year. Its remarkable performance consistently exceeds expectations for revenue and, importantly, order growth.
Image source: Getty Images.
The order growth continues to generate a massive increase in backlog (as shown below), and given the recent capital spending commitments made by hyperscalers like Amazon, Alphabet, and Microsoft, it's understandable if investors start penciling in more growth over the medium term.
Data source: Vertiv presentations. Chart by author.
Wall Street expectations for Vertiv
Wall Street has already started upgrading estimates, with the consensus (shown below) for 2026 matching Vertiv management's recent estimate of $2.1 billion to $2.3 billion in free cash flow (FCF).
Here is a truncated discounted cash flow analysis reverse-engineered to determine the terminal growth rate required to justify the current enterprise value of $100 billion. I've used Wall Street consensus FCF to 2028, and assumed 14% and 15% growth (g) in line with market expectations for data center spending, rising from $1 trillion in 2026 to $1.7 trillion in 2020. I've used a weighted average cost of capital (WACC) of 9%, which is in line with an industrial technology company.
|
Metric |
2026 Est. |
2027 Est. |
2028 Est. |
2029 Est. |
2030 Est. |
|---|---|---|---|---|---|
|
Free cash flow |
$2.287 billion |
$2.669 billion |
$3.543 billion |
$4.048 billion |
$4.648 billion |
|
Discount factor |
0.92 |
0.84 |
0.77 |
0.71 |
0.65 |
|
Present value |
$2.098 billion |
$2.246 billion |
$2.736 billion |
$2.868 billion |
$3.021 billion |
|
Sum of present value for the next 5 years |
$12.97 million | N/A | N/A | N/A | N/A |
Data sources: Author's analysis, marketscreener.com
Taking the current $100 billion valuation and subtracting the present value of the next five years' FCF of $12.97 billion yields a required present value of $87 billion. This gives a terminal value (TV) of $87 billion × (1.09)^5 = $134 billion.
Using Terminal Value = FCF in 2030*(1+g)/(WACC-g), we can solve for g given a TV of $134 billion, a 2030 FCF of $4.648 billion, and a WACC of 9%.
Ultimately, g = 5.3%.
In plain English, this means that to justify Vertiv's current valuation, the company's FCF will have to grow by 5.3% from 2030 into perpetuity.
NYSE: VRT
Key Data Points
What it means to investors
If you assume the overall economy grows at 3%, a perpetual growth rate of 5.3% implies decades of above-GDP growth, which seems optimistic. Moreover, there are signs of slowing investment commitments with OpenAI reportedly aiming to spend $600 billion by 2030, down from an earlier figure of $1.4 trillion, possibly in response to difficulties obtaining funding.
All told, while AI stocks will trade on near-term momentum and newsflow, and could go higher, a stock like Vertiv looks richly priced and will look even more so if the current growth assumptions aren't achieved. Now is not the time to be piling into the AI center trade.
