Investing

NVIDIA Just Started an AI Gold Rush and One Stock Is the Clear Winner

Eric Bleeker

Published: May 26, 2024 8:26 pm

Last Updated: May 27, 2024 6:25 am

The AI data center boom has begun! Here’s a stat that will show how much power these data centers will need: it’s predicted that by 2026, AI data centers are expected to add as much power as the entire nation of Japan consumes in a year.

Obviously, this is going to create challenges. How do you handle all this power consumption? Also, how do you design data centers to be more efficient? One solution is more liquid cooling, which is described in the discussion below between 24/7 Wall Street Analysts Eric Bleeker and Austin Smith. One stock you won’t want to ignore in this trend is Vertiv (NYSE: VRT). The stock is poised to become a major winner in the transition to AI data centers.

Why the Boom in NVIDIA GPUs Could Make Vertiv a Massive Winner

On NVIDIA‘s (Nasdaq: NVDA) recent conference call, CEO Jensen Huang had this to say (emphasis added):

“We also have been priming the pump, if you will, with the entire ecosystem, getting them ready for liquid cooling. We’ve been talking to the ecosystem about Blackwell for quite some time. And the CSPs, the data centers, the ODMs, the system makers, our supply chain; beyond them, the cooling supply chain base, liquid cooling supply chain base, data center supply chain base, no one is going to be surprised with Blackwell coming and the capabilities that we would like to deliver with Grace Blackwell 200. GB200 is going to be exceptional.”

Here are some key points from Eric and Austin’s discussion:

• The massive rise in AI data centers benefits what you’d call thermal solution providers as well as companies providing power supply.
• The headline figure: just from AI data centers, they’re expected to add the equivalent of the entire nation of Japan to the power grid within two years!
• So, there’s going to be some major winners in the market around power consumption and making these data centers more efficient. One clear one is Vertiv, which is up 555% in just the past year.
• For comparison, NVIDIA is up “just” 243% in the past year.
• Now, NVIDIA also just had earnings where it grew its data center business by 427%. So, that kind of share price gain is pretty understandable.
• By contrast, Vertiv saw 8% sales growth last quarter. Maybe even more confounding is that 2025 revenue growth is projected at 12% growth. And the company trades for 100X trailing earnings!
• So, why is Vertiv’s stock on such a run?
• Vertiv sells a number of solutions, but it’s a leader in liquid cooling.
• Liquid cooling is supposed to grow at a 54% CAGR from 2023 to 2028. Some estimates have liquid cooling usage growing from 1% of servers in the past year to more than 20% within the next 18 months.
• That’s a market Vertiv has the inside track on.
• The company should see its margins improve to levels Vertiv has never seen. That allows revenue to grow slower while its earnings per share could grow at astronomical rates.
• Vertiv does have competitors, but growth in liquid cooling is going to be so fast, that the key challenge is just getting to scale.
• Right now, Vertiv trades for about 37X 2025 earnings, or 22X its project 2027 earnings.
• So the key idea here is: that revenue growth isn’t huge, but it’s the earnings CAGR is impressive.
• One question when looking at estimates: is Wall Street really underestimating the buildout and required liquid cooling needed in servers across the next 18 months as NVIDIA’s Blackwell platform scales?
• The other question for a lot of companies in the power and liquid cooling space is whether they’ll be getting more revenue from AI servers, but you need to balance that against traditional servers seeing no or negative growth.
• Still, you look at the quotes from NVIDIA and needing to “prime the pump” for Vertiv’s markets and it’s hard not to feel like even after a 550% run the stock has more room to run.

Transcript:

Eric, AI and NVIDIA are the gold rush of gold rushes.

And we’ve all talked about it and everyone wants to know how can I profit from the AI boom?

How can I profit from the AI trend?

Should I buy NVIDIA?

Boy, it feels risky at these levels, but you’re telling me that NVIDIA just started, just kicked off an industry with one potential winner here that investors might want to think about.

Yeah.

And you know, one question I’m getting a lot is how do I play AI’s power consumption.

You know, AI is supposed to add so much power, new data centers coming on the grid that within the next two years, it’s expected to add just data centers as much power as the entire nation of Japan requires, which is an advanced economy.

That’s a pretty staggering figure.

So talking about this on NVIDIA’s earnings call, I’m always looking since, you know, they’re kind of the leader in this AI boom with data centers.

What are they saying are their priorities and what companies are going to be able to draft off, you know, where they’re leading today?

I’m going to read a quote from the NVIDIA CEO on the earnings call about one particular market.

He said we have also been priming the pump, if you will, with the entire ecosystem getting ready for liquid cooling.

We’ve been talking in the ecosystem about Blackwell, which is their next-generation chip for quite some time.

And the CSPs, the data centers, the ODMs, the system makers, our supply chain, beyond them, the cooling supply chain base, liquid cooling supply chain base, data center supply chain base.

No one is going to be surprised with Blackwell coming and the capabilities that we would like to deliver with the Grace Blackwell 200.

GB200 is going to be exceptional.

Now, GB200 is kind of the all-in-one server solution they have that costs up to $3 million.

But what NVIDIA CEO is talking about there is the need for liquid cooling because of kind of the thermal envelope and the power consumption from these AI servers.

So the question is, if liquid cooling is going to be exploding, what is the stock to play this trend?

Clearly, there already has been a winner here.

It’s named Vertiv.

It’s up 555% in the past year alone.

And what’s going to be shocking to everyone out there, NVIDIA is up 243% in the past year.

So Vertiv is up much more.

But as we’ve talked about, Austin, NVIDIA grew its data center business by 427%.

Vertiv, which is up 555% in the past year, has seen its sales grow 8%.

So the question is, what’s going on here?

Well, Vertiv, it sells a number of solutions, but it is a leader in liquid cooling.

Liquid cooling is supposed to grow at a 54% compounded annual growth rate through 2028.

And it’s a market where they have the inside track on.

So while their total revenues won’t be growing as much, the expectation is their margins are going to be growing substantially from selling these liquid cooling systems.

So while revenue might not be impressive, they’re looking at 68% CAGR in this period for their earnings.

They’re trading at 37 times 2025, about 22 times 2027.

So that’s what you’re looking at with this company.

Slower revenue growth, insanely impressive earnings growth.

The question is, is Wall Street still underestimating the build out and required liquid cooling?

There’s a lot of other questions about the company.

One challenge with companies involved in power consumption is what’s their upside on AI versus what they’re losing from traditional server sales stagnant.

But I think you have to look at the quotes from NVIDIA talking about priming the pump for Vertiv’s essential market and feel that even at the multiples they’re selling for today, even after a 550% run, there’s still upside on the stock if this AI data center boom exceeds expectations.