Data Center Expansion And AI R&D Will Drive Future Success

Key Takeaways

• Vertiv is poised for revenue growth by leveraging data center expansion and improving operational leverage to boost net margins.
  
• Strategic capital deployment, R&D investments, and supply chain enhancements support flexibility, innovation, and cost mitigation.
  
• Geopolitical uncertainties and regional weaknesses could pressure Vertiv's operating margins and revenue stability, affecting overall financial performance and stock valuation.

Catalysts

Designs, manufactures, and services critical digital infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.

• Vertiv Holdings Co. is positioned for strong revenue growth by capitalizing on the rapid expansion of data centers driven by the increasing demand for hyperscale and colocation facilities, with trailing 12-month orders up 30%, particularly from the Americas.
  
• The company expects to enhance its net margins through improved operational leverage, evidenced by a 380 basis point increase in adjusted operating margin in Q4 2024, driven by strong commercial execution and efficiencies.
  
• With a significant reduction in net leverage to 1x and over $1.1 billion in adjusted free cash flow for 2024, Vertiv has substantial flexibility for strategic capital deployment, including $2.4 billion remaining under the Board's share repurchase authorization, supporting earnings per share growth.
  
• The company's ongoing investments in research and development, including a $50 million increase in 2024, are focused on developing advanced technologies to support AI-driven data center requirements, indicating potential for revenue expansion through innovative product offerings.
  
• Vertiv's strategic initiatives to strengthen its supply chain and expand its manufacturing footprint, especially in the United States, are designed to mitigate potential tariff impacts, which should sustain and potentially improve its price/cost dynamics and operational profitability in 2025.

Vertiv Holdings Co Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Vertiv Holdings Co compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Vertiv Holdings Co's revenue will grow by 15.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.2% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $5.17) by about April 2028, up from $495.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 35.6x on those 2028 earnings, down from 55.8x today. This future PE is greater than the current PE for the US Electrical industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 1.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Vertiv Holdings Co Future Earnings Per Share Growth

Risks

• The company acknowledges material risks and uncertainties associated with forward-looking statements, which could impact future financial and operating performance, potentially affecting revenue and earnings.
  
• Supply chain resilience is emphasized, yet the potential tariff impacts and geopolitical uncertainties could create cost pressures and impact operating margins.
  
• The company's reliance on geographic areas like the Americas, despite significant growth, could be risky if market conditions change, impacting revenue stability.
  
• The volatile reaction of the stock market to analyst reports and news suggests investor sensitivity, which could affect Vertiv's stock valuation and market perception.
  
• Weakness in regions like EMEA, with shifting project activity, might impact revenue projections and overall sales growth, affecting the company's financial outlook.

Valuation

• The assumed bullish price target for Vertiv Holdings Co is $135.63, which represents one standard deviation above the consensus price target of $113.45. This valuation is based on what can be assumed as the expectations of Vertiv Holdings Co's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $146.0, and the most bearish reporting a price target of just $73.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $12.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $72.71, the bullish analyst price target of $135.63 is 46.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.