Recently, Vertiv Holdings Inc. (VRT) has experienced a decline in its stock price. A month ago, VRT was trading at around $90, but as of July 18th, it has dropped to approximately $81, marking about a 9% decrease.
Felix Wang, an analyst at Hedgeye, identified Vertiv’s slowing growth and listed VRT as a short idea.
The big question is whether the data center market is indeed slowing down, potentially leading Vertiv to lower its guidance for the second half of 2024. Vertiv’s Q2 earnings call is scheduled for July 24th. Investors are keen to see if the company will confirm growth concerns and disappoint the market, or if it will alleviate worries and show signs of a rebound.
Let’s take another look at the growth and investment trends in the data center market.
Data Center Demand and Market Growth
The demand for data centers in North America continues to hit record highs(US data center absorption and construction).
Key insights from recent reports by JLL and CBRE include:
- Data Center Demand and Investment Trends
- 83% of under-construction capacity is pre-leased
- Record low vacancy rates of 3.7% in 2023, with Northern Virginia at just 0.2% availability as of January 2024.
- A 18.6% increase in average asking rental rates for major wholesale colocation markets in 2023.
- The US data center market saw the highest price increase among commercial real estate assets.
- Data Center Supply Market Growth
- The eight major US data center markets grew by 26% in 2023.
- Expansion from primary to secondary markets, such as Columbus, Minneapolis, Reno, Mississippi, and Indiana.
- Data center construction reached new heights with 3,077.8MW under construction in primary markets.
- Additional 554MW in secondary markets in 2023.
In summary, the data center market is currently saturated, leading to accelerated expansion into secondary markets. With the increasing demand for AI and large language models, investments and new developments in data centers are expected to continue.
Power Demand Growth from Data Centers
A report by Goldman Sachs in April highlighted the anticipated surge in power demand driven by AI and data centers:
- 15% CAGR in data center power demand from 2023-2030
- Data centers will make up 8% of total US power demand by 2030 from about 3% currently
- 2.4% CAGR in US power demand growth through 2030 from 2022 levels(vs. ~0% over the last decade)
- Data centers will occupy about 90 bps of the 2.4%.
Goldman Sachs predicts that, even with improved power efficiency, the power demand from data centers will double by 2030. They also see growth opportunities in utility sector stocks, such as power supply chains, even though the utility sector tends to be undervalued due to its sensitivity to interest rates. This is because data centers are driving significant growth.
Strong Performance in Utility Sector
According to DCD(DataCenterDynamics), utilities like American Electric Power (AEP) and Dominion Energy are experiencing rapid growth in power sales due to data center projects:
- American Electric Power
- 10.5% increase in commercial load in Q1 2024, driven by data centers.
- Significant investments in data centers and commercial customers in Indiana, Ohio, and Texas.
(Amazon and Google’s data center projects in Indiana are the main drivers of increased capacity) - Q1 2024 net income of $1 billion, up from $397 million in Q1 2023.
- Q1 2024 operating earnings of $670 million, up from $572 million in 2023.
- Dominion Energy
- Plans to connect 15 more data centers in Virginia in 2024.
- Increase in individual facility demand from 30MW to 60-90MW and campus requests from 300MW to several GW.
- Reduction in the time to ramp up capacity from 4-5 years to 2-3 years.
- Q1 2024 net income of $674 million, down from $981 million in 2023.
- Q1 2024 operating earnings of $483 million, down from $515 million in 2023.
- Eaton Corporation
- Data center market growth forecast from a CAGR of 16% to 25% for the years 2022-2026(1Q Earnings Presentation)
Given the double-digit annual growth rate of the data center market and the projected doubling of power demand from data centers by 2030, any claims that the data center market is slowing down seem likely to be short-term concerns. Although we can’t know Vertiv’s exact order backlog before the earnings announcement, the increasing investments in new data centers and the advancement of data center infrastructure suggest that the demand for Vertiv’s cooling systems is unlikely to decrease.
So, why has Vertiv’s stock price been dropping lately?
Why Vertiv(VRT) Stock Drops Lately
Despite the growth prospects, several factors in the market seem to be driving a sell-off in Vertiv’s stock:
- Market Trends: Rotation into small and mid-cap stocks, weakening of big tech stocks like Nvidia.
- Political Issues: Biden’s harsher trade restrictions to limit China(FDPR), Trump’s comments on increasing trade barriers.
- Investor Sentiment: Anxiety ahead of the earnings announcement.
Vertiv, along with Nvidia, has received $500 million from the U.S. Department of Energy (DOE) to develop next-generation cooling solutions. This means Vertiv’s performance is likely tied to Nvidia’s, making it vulnerable to fluctuations in Nvidia’s stock price.
What You Need To Know Ahead of VRT’s Earnings Call
Vertiv’s main customers include AT&T, Equinix, Verizon, Siemens, Vodafone, Reliance, America Movil, Alibaba, and Tencent.
Equinix is the world’s largest data center provider, offering colocation and interconnection services. As part of the real estate sector, which is sensitive to interest rates, Equinix’s stock has been rising with the increasing likelihood of interest rate cuts.
In addition to Equinix, companies like Digital Realty Trust (DLR), which owns data center assets, and the Global X Data Center & Digital Infrastructure ETF (DTCR) are also seeing stock price increases. The high growth in the data center market is benefiting real estate companies that own or operate data centers.
Analyst ratings on VRT haven’t changed much compared to before.
Right now, Vertiv’s stock is struggling due to the weakness in big tech and the overall adjustment in tech stock prices.
However, if Vertiv delivers results that match the growth in the data center market, it could meet market expectations and support its previous high stock price. Currently, Vertiv’s stock price is back to where it was before the first quarter earnings rally.
From a long-term perspective, the current stock price still looks attractive for investment.
*References: Goldman Sachs, JLL, CBRE, Eaton, Stock Analysis, Seeking Alpha