Has Vertiv Holdings Co (NYSE:VRT) hit a bottom? That’s the big question as the stock has pulled back by roughly 32% from its peak reached in May. While even after the decline, the stock remains up nearly 45% year to date, it’s been under immense pressure in recent weeks amid a broad sell-off around semiconductor and AI plays.
Vertiv has carved a niche as a developer of equipment used in data centers. While it does not make chips, it focuses on power systems, cooling solutions, and specialized racks integrated in data centers. Therefore, the company’s long-term outlook hinges on the rapid rise of artificial intelligence and the soaring capital expenditures on data centers.
Why is Vertiv Selling Off?
Vertiv Holdings Co (NYSE:VRT) has sold off from its peak despite delivering strong financial results. The selloff has come as investors focus on a revenue miss, in addition to concerns that some AI data center projects are taking much longer to convert into reported sales. While revenue in the second quarter was up 24% year over year to $3.27 billion, it fell below consensus estimates of $3.38 billion. Earnings per share, on the other hand, beat estimates of $1.42 at $1.52.
For a stock priced for extremely high growth amid the AI boom, it was always going to come under pressure on a revenue miss. While the stock has gained significantly over the past year, expectations were exceptionally high, heading into Q2 earnings. Therefore, the stock tanked as investors questioned whether growth would be better amid elevated expectations.
The selloff wave also appears to have been exacerbated by management signaling potential supply chain constraints and timing shifts that affect when data centers translate to revenue.
Is Vertiv a High Growth Recovery Play?
Vertiv Holdings Co (NYSE:VRT) looks more like a bounce-back play, as the stock has weakened sharply, than the underlying business. Underlying fundamentals remain strong, with the AI/data center infrastructure business benefiting from rising demand for power and cooling equipment.
Despite market disappointment, management has already raised the full-year outlook to $13.8-$14.2 billion in revenue and $6.65-$6.75 in adjusted EPS, suggesting the business has not suffered any form of deterioration. The hike suggests strong momentum as demand fundamentals affirm a robust growth environment.
Additionally, Vertiv is positioned in one of the most active parts of the AI infrastructure buildout. Demand for cooling systems is expected to continue growing as GPUs become more powerful, and data centers require more electricity. The company is increasingly expanding its manufacturing capacity, having acquired ThermoKey also to strengthen its heat rejection portfolio.
Key Risks to Watch
Even as fundamentals remain strong, supply chain delays and the complexity of scaling data center infrastructure pose significant risks to Vertiv’s outlook. While investors are expecting near-term perfection, delayed shipments or contract suspension could rattle investors.
Vertiv is also heavily exposed to the data center buildout, especially among hyperscalers. Consequently, the company’s order growth could decelerate as large customers slow or delay data center capex.
While backlog reached record highs of $15 billion as of the end of last year, management has warned of potential cancellations or rescheduling, which could affect sales.
Bottom Line
Vertiv Holdings Co (NYSE:VRT) looks like a potential bounce-back play, but not because the stock has suddenly become cheap. The stronger argument is that the recent selloff may have overreacted to a revenue timing miss while management simultaneously raised its full-year outlook. However, with valuation still elevated and data-center project execution becoming more complex, investors should expect significant volatility.
Additionally, the stock is a potential rebound play given the relatively low short interest of 3.43% of float, with approximately 13.06 million shares sold short as of August 14.
Despite the deep pullback, Vertiv maintains a high institutional ownership, which is a positive structural signal. As of the end of the first quarter, 96 hedge funds held stakes in the company according to Insider Monkey database, a slight drop from 112 as of the fourth quarter. However, the figure climbed back to 112 in the second quarter.
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