Why AI Frontrunner Vertiv Holdings Stock (VRT) is Temptingly Overpriced

Yahoo

15-04-2025

AI data centers have been a fascinating and lucrative market corner in the last few years, sending many traditional industrial names, such as Vertiv Holdings (VRT), into the big leagues. Now sitting as one of the most direct plays on the infrastructure surrounding AI, it has become one of the key players in the cooling and thermal systems that keep this technology operational.
Discover outperforming stocks and invest smarter with Top Smart Score Stocks.
Filter, analyze, and streamline your search for investment opportunities using Tipranks' Stock Screener.
However, with the share price up well over 607% in the last five years, investors would have good reason to question whether there is room for further upside or if the market has already priced in the perfect scenario going forward. I'm leaning towards the cautious side here, and although some estimates suggest there could still be enormous potential to be realized, I think there could still be a long way down for investors if uncertainty lingers.
As many would expect, the recent frenzy around AI companies means the company is thinking ahead. Net sales jumped 27% in the last year for Q4, showing strong growth across all regions. Operating profit soared by a healthy 53% to $504 million, with EPS up 77% in the same period.
Such numbers can be hard to match over the long term, but management has presented some impressive guidance for 2025, with a record backlog of $7.2 billion, sending EPS a further 25% higher to $3.55. Of course, this is no surprise in the AI sector, but from my perspective, this is not just a company catching a lucky break in an emerging area of the market; it's been preparing for this revolution for some time and has plenty of plans to make the most of it.
By perfecting the technology needed for data centers and telecoms sites long before AI became the buzzword all companies have been chasing, Vertiv has built a presence at the heart of hyper-scaling AI cluster deployment. By moving away from providing cooling units and thinking more about integrated systems, management has offered customers a wide range of full-stack solutions, including intelligent monitoring and system prefabrication.
Most investors would probably agree that AI is the most dynamic topic in the market, making companies with a competitive moat incredibly compelling at the right price. We already know that demand for AI will likely be strong, meaning that workloads will consistently need cooling systems at scale. If Vertiv management can continue to capture this opportunity and build further income streams, growing earnings and margins will likely be the outcome.
Free cash flow is improving over time, and the balance sheet looks increasingly healthy as margins grow. While many will see the company involved in AI, plenty will consider the firm as an industrial player, making 22% margins incredibly notable. With debt levels seemingly well under control, management seems to have plenty of flexibility to continue reinventing or acquiring businesses or returning capital to shareholders.
However, market optimism in an emerging technology can be a dangerous environment. While AI is an exciting prospect, many share prices have soared far beyond traditional valuation metrics. While the P/E ratio of 49.7 is not extreme in today's market, a company traditionally considered a cyclical industrial provider might be slightly out of the comfort zone for many investors (including myself).
If the current ambitions for AI adoption fail to materialize, spending on the technology could have a fairly dramatic fall, leading to the market repricing of companies that have seen rallies. Even if the hype remains strong, I suspect Vertiv will need to continue executing its strategy with minimal room for error. Any hiccups in the timing of orders, breakdowns in the supply chain, or margin slippages could send investors to the exit door.
Whether the company will be considered an AI giant or an industrial firm will play a role in what makes sense for the valuation. As I noted, a P/FCF of 37, a P/S ratio of 5, and other metrics make sense in an AI context, but if repricing sets the company back in the industrial arena, there could be a fairly dramatic drop to follow. My estimate for fair value is about the $73 mark based on future cash flows under a discounted cash flow (DCF) calculation. Still, it will be driven by the demand for AI and how well management can navigate the resulting uncertainty.
I'd say the company is compelling, but as always in the market, price matters. For those looking to build a position in AI infrastructure, this looks to be an excellent place to start, but it will need to be closely evaluated for how resilient it can be if the tide begins to turn.
Management clearly has confidence that this strategy will work, with steady growth across key performance indicators. Still, I'd be paying close attention to how this messaging evolves over time as uncertainty lingers in the economy and in the spending plans for AI companies.
On Wall Street, VRT stock carries a Strong Buy consensus rating based on 13 Buy, two Hold, and zero Sell ratings over the past three months. VRT's average price target of $118.93 implies approximately 71% upside potential over the next twelve months.
By all measures, VRT has done a fantastic job of repositioning itself as a key player in the digital infrastructure needed for AI, with essential equipment, a solid growth story, and impressive execution. However, the share price now likely reflects a large amount of this success and potential going forward. The shares are not cheap by traditional estimates, and any of the outlined risks could easily become a problem.
It is clear to me that the AI infrastructure revolution is here to stay, but as always, I recommend caution and only buying at the right price. Therefore, I'm cautiously bearish on this one, with concerns that uncertainty over the coming months will gradually fizzle out of much of the excitement seen over the past 18 months.
Disclaimer & DisclosureReport an Issue