Expanding Into Liquid Cooling And Advanced Technologies To Boost Market Leadership And Profits

Key Takeaways

• Vertiv's expansion and R&D investments in evolving sectors and liquid cooling tech aim to boost its industry leadership, market share, and profitability.
  
• The company's strategic focus on service differentiation and multi-sourcing aims to secure recurring revenue and minimize supply chain risk, enhancing operational efficiency and net margins.
  
• Potential revenue volatility and margin pressure due to reliance on future orders with long lead times, intense competition, geopolitical risks, and persistent inflation challenges.

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 is leveraging its solid position in a rapidly expanding and evolving industry by increasing its research and development (R&D) and expanding capacity, which should further distinguish its unique position as an industry leader and positively impact future revenue and net margins through enhanced market share and product offerings.
  
• The company's strong order growth, particularly in the Americas and EMEA, alongside a significant book-to-bill ratio indicates robust demand for its products and services, expected to drive future revenue growth.
  
• Vertiv's focus on resilience and the implementation of multi-sourcing strategies and supply chain risk mitigation plans aim to maintain and improve operational efficiency, which could positively influence future net margins by reducing potential costs related to supply chain disruptions.
  
• Expansion plans, particularly in liquid cooling technology with a global increase in production capacity, address the rising demand for advanced cooling solutions in data centers, which is likely to drive revenue growth as this technology becomes more critical.
  
• The emphasis on service differentiation, leveraging a large field service engineering team, indicates a strategic move to secure recurring revenue through high-margin service contracts, expected to enhance overall profitability and strengthen customer relationships.

Assumptions

• Analysts are assuming Vertiv Holdings Co's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $4.16) by about August 2027, up from $498.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2027 earnings, down from 59.3x today. This future PE is greater than the current PE for the US Electrical industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 1.41% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Risks

• Potential risks with relying heavily on future orders, especially those with long lead times, may lead to revenue volatility and affect cash flow predictability if there are delays or cancellations in these large projects.
  
• The intense competition in the data center market, despite Vertiv's advantages, could pressure margins over time as customers might push for better pricing or more value-added services, impacting net margins.
  
• Geopolitical risks and supply chain complexities, especially with expansions in diverse regions, could lead to increased operational costs or disruptions, affecting earnings negatively.
  
• The ongoing investments in capacity and technology, while necessary for sustaining growth, present a significant execution risk. Any delays or cost overruns could impact expected earnings improvements.
  
• The assumption of persistent inflation and the strategy to pass these costs onto customers might not always be viable in a competitive market environment. If unable to fully offset these increased costs, it could lead to margin compression.

Valuation

• The analysts have a consensus price target of $101.77 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 $115.0, and the most bearish reporting a price target of just $91.33.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $10.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $78.88, the analyst's price target of $101.77 is 22.5% 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.