AI Investments And NVIDIA Collaboration Will Drive Future Success

Key Takeaways

• Strategic R&D investments and AI collaborations position Vertiv for significant revenue growth and leadership in advanced data center solutions.
  
• Strong order pipeline and effective tariff mitigation are set to secure sustainable revenue growth and protect profitability amidst global trade challenges.
  
• Tariff risks and supply chain challenges threaten Vertiv's profitability, with increased costs and uncertainty in key markets potentially straining growth and cash flows.

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's investments in R&D and capacity are expected to drive long-term growth, with particular emphasis on AI infrastructure and data center demand, leading to significant revenue increases.
  
• The company's strong order pipeline and backlog expansion, with a book-to-bill ratio of 1.4x, suggest sustainable revenue growth and market share gains in the near term.
  
• Strategic tariff mitigation efforts, including supply chain optimization and pricing adjustments, are expected to protect operating margins and ensure profitability despite global trade uncertainties.
  
• Continuous focus on operational excellence, such as the Vertiv Operating System and efforts to enhance productivity and efficiency, are likely to support margin improvements over time.
  
• Vertiv's collaboration with NVIDIA on AI infrastructure projects like iGenius positions the company as a leader in advancing AI factory designs, potentially leading to increased earnings from higher-margin innovative solutions.

Vertiv Holdings Co Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vertiv Holdings Co's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 14.8% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $4.56) by about April 2028, up from $495.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 55.2x today. This future PE is greater than the current PE for the US Electrical industry at 21.5x.
• 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 dynamic and fluid nature of tariffs, particularly involving China, poses a significant risk with potential impacts on operating margins and profitability, as any escalation or adverse change in tariff conditions could elevate costs.
  
• Potential disruptions or changes in the supply chain, especially relating to geopolitical tensions, might have a detrimental effect on Vertiv's operational efficiency and could hinder revenue growth.
  
• Uncertainty in the European market, with slower AI infrastructure build, could result in lagging growth compared to other regions like the Americas and APAC, impacting overall revenue growth.
  
• The ambitious plan to offset tariff impacts relies heavily on successful supply chain reconfiguration and repricing efforts, which may not completely mitigate the tariff-related cost increases, potentially lowering net margins.
  
• The need to continuously invest in operational capabilities and supply chain resilience might strain cash flows, particularly under the pressure of unexpected downturns in demand or unforeseen operational challenges.

Valuation

• The analysts have a consensus price target of $112.188 for Vertiv Holdings Co based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $11.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $71.82, the analyst price target of $112.19 is 36.0% 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.