As an investor, I gravitate toward quality compounders. These are generally asset light companies with wide economic moats, predictable revenue, high margins and a history of growing earnings and free cash flow. This is underpinned by high returns on invested capital (ROIC). Think Visa’s network effects or Microsoft’s entrenched software ecosystem.
Vertiv Holdings Co. (VRT) doesn’t fit the mold perfectly. While the company and its brands have a long history dating back to the middle of the 20th century, Vertiv’s frequent ownership changes make its financial history difficult to piece together. Most recently, it was spun off from Emerson Electric in 2016. But its recent surge, fueled by the AI-driven data center boom, aligns with my focus on capitalizing on secular trends. After a nearly 50% pullback from its 2024 highs, Vertiv presents exposure to a secular growth opportunity at a reasonable price.
My investment thesis: Vertiv offers pure play exposure to data center spending due to its critical role in AI infrastructure. Despite near-term uncertainties, Vertiv’s recent pullback offers a more reasonable entry point supported by reasonable visibility into future demand.
AI Infrastructure: What Vertiv Does And Why It Matters Now
Vertiv builds and services critical infrastructure for data centers and communications networks. Its offerings span three main areas:
- Power Management: UPS systems, switchgear, busbars
- Thermal Management: Air and increasingly liquid cooling for dense AI server environments
- IT Infrastructure and Services: Racks, PDUs, prefabricated modules, maintenance contracts
In 2024, Vertiv generated $8.012 billion in revenue, with 78% from product sales ($6.245B) and 22% from services ($1.767B). Its customer base includes hyperscalers like Amazon, Microsoft, and Alphabet, which drive more than half of Americas orders. Geographically, revenue splits 56% Americas, 22% APAC, and 22% EMEA.
What makes Vertiv stand out is its focus on high-growth markets like AI, edge computing, and hyperscale data centers. Unlike broader industrial peers like Schneider Electric or Eaton, this singular focus aligns the Vertiv with secular tailwinds in the areas. This gives it a strategic edge as global demand for AI compute accelerates.
Its partnerships with NVIDIA and Intel on liquid cooling solutions give it a technological lead in an area where thermal bottlenecks are becoming critical. And the company’s modular and prefabricated systems offer speed and scalability making Vertiv a go-to partner for hyperscalers. Competitors like Legrand or Eaton cannot match Vertiv’s deployment agility.
Recent Performance: A Beneficiary of AI
Vertiv’s focused strategy appears to be paying off. Q4 2024 revenue grew 27% and adjusted operating profit swelled to $504 million (+53% YoY) as the company converted its backlog and grew its services business.
A look at Vertiv’s financial performance over the past 5 years illustrates the benefits of the AI boom. In 2020, revenue came in at $4.370 billion with a 7.8% operating margin and $165 million in free cash flow. By 2024, revenue jumped to $8.011 billion, margins improved to 19.4%, and adjusted FCF grew to $1.135 billion.
This performance reflected alignment with AI demand. Hyperscaler capex exceeding ~$140 billion in 2025 is funneling into infrastructure. Vertiv’s liquid cooling and integrated power systems are becoming an indispensable part of the data center.
Operationally, Vertiv has sharpened its execution. On the 2022 earnings call, CEO Giordano Albertazzi stated that the company realized $365 million in pricing gains to combat inflation (Q4 2022 Earnings Call). By Q4 2024, Albertazzi noted on the earnings call that operational efficiencies and favorable pricing dynamics resulted in a 380 basis-point margin expansion to 21.5% adjusted. This reflects both robust demand and sustained pricing power.
The stock reflected the company’s performance with a 1200% move from $11.40 (Jan 2020) to its high of $153.49 (Jan 2025).
The Pullback: Short-Term Uncertainty
Today, Vertiv stock price sits near $70 per share, a +50% correction. The correction reflects both valuation compression and near-term uncertainty. At its peak, the stock traded at 44x 2024 EPS, well above peers. Concerns emerged in early 2025 as TD Cowen noted hyperscalers like Microsoft were redesigning data centers to support denser AI setups, temporarily slowing orders. Vertiv’s Q1 2025 guidance reinforced this unease, projecting EPS of $0.57-$0.63 against a $0.64 consensus. Add in a broader tech pullback, and Vertiv’s 23% YTD decline isn’t surprising.
These risks are real, though. Vertiv’s growth is highly dependent on the AI narrative and data center spending of a few companies. Coupled with the potentially rapid changes in technology as illustrated by the Deepseek scare, it is not unreasonable to question the growth trajectory of Vertiv.
Is There Visibility to Confidently Assess Vertiv’s Future?
For an investor, visibility is the bridge between the story and valuation. Vertiv’s visibility rests on four pillars—backlog, hyperscaler plans, services, and competitive edge—supporting my assumptions for revenue, margins, and FCF.
Backlog and Guidance: Vertiv ended 2024 with a $7.3 billion backlog, up 30% YoY. That backlog covers 9-12 months of sales and underpins management’s 15-17% revenue growth guidance for 2025 ($9.125B-$9.275B). Americas orders were up over 50%, driven by hyperscaler demand and AI workloads. Updates on this guidance will be critical to understand whether demand has actually shifted.
Hyperscaler Spending: This is the elephant in the room, at the moment. Will the hyperscalers that make up so much of Vertiv’s growth continue to spend? Despite concerns about Microsoft curbing spending, the infrastructure and compute needed to support AI is not over. Hyperscalers are investing billions into AI infrastructure. This capital isn’t discretionary. AI models, especially agent-based ones, require 10x the compute of traditional systems. IDC estimates a ~12% CAGR in global data center capex through 2028. That spend will need power and cooling. Vertiv will be central to that buildout.
Services and Switching Costs: Services made up 22% of Vertiv’s 2024 revenue. That number is growing. This growth stems from long-term service contracts tied to power and thermal hardware which last 10 to 15 years or more. Once installed, Vertiv’s equipment (particularly its data center racks) creates significant switching costs for customers. Replacing these racks isn’t just a matter of swapping hardware; it requires extensive operational redesign and risks costly downtime. This deters customers from switching. The company is targeting 25% of revenue from services longer-term. That shift should support margin expansion and FCF visibility.
Competitive Edge: Vertiv does have competition, but it’s moat is strengthening. Vertiv possesses solid brand equity from brands like Leibert making the company a go-to company for its liquid cooling technology. Further, as the company sells more of its hardware, service contracts will grow locking-in recurring revenue. Add to this its relationship with hyperscalers, high switching costs, and focused innovation (liquid cooling, prefabricated modules), Vertiv has real advantages over competitors like Schneider, Eaton, and Huawei.
These points on visibility can give us some confidence in narrowing down a fair value for Vertiv. Not perfect, but credible.
Valuation: What Is a Reasonable Price?
Rather than anchoring on a single valuation target, it helps to view Vertiv through the lens of scenario analysis. Visibility into demand makes it possible to model a base of outcomes, while recognizing the range of risks.
More Optimistic Case:
The more optimistic case plays out if AI infrastructure continues to expand at its current pace driven by hyperscaler capex, enterprise adoption, and emerging AI use cases (like agents). In this scenario, Vertiv continues winning business at scale, its services arm grows meaningfully, and margin expansion follows. Revenue would effectively rise at a 13% CAGR for the next 5 years (15% CAGR tapering to 10%). Adjusted operating margins expand from 19.3% (2024) to 23% as high-margin services and liquid cooling scale. Free cash flow ($1.135B adjusted in 2024) grows in tandem, reaching $2.4 billion (19% CAGR). Under these conditions, a 10% (WACC) discount rate and 4% terminal growth rate imply an equity value of ~$88 per share.
Less Optimistic Case:
The less optimistic case assumes that while AI infrastructure continues to grow, the pace moderates, competition intensifies, and Vertiv captures a smaller share of the opportunity. This assumes a slight miss on 2025 revenue (+14%) and margin (21%) guidance. Revenue still grows, but at ~9% CAGR through 2029. Free cash flow grows at a more conservative 13% CAGR. This scenario also assumes Vertiv’s services business expands, but without enough leverage to offset cyclical pressures or rising costs. Applying a 10% discount rate and a more conservative 3.5% terminal rate yields an equity value of ~$65 per share.
These aren’t predictions. They’re confidence intervals based on reasonable assumptions. We can argue that the current stock price of ~$70 reflects market skepticism and prices in slower growth. But if Vertiv executes, there’s potential for meaningful upside. If demand stalls or competition intensifies, downside exists. The key is that the visibility discussed justifies some optimism and therefore, leaning in at the right price.
Final Thoughts
While Vertiv diverges from my typical compounder stock profile, it does offer direct exposure to a rapidly growing area of AI infrastructure. Its focus on the data center, competitive strengths, and demand visibility make it a credible growth story at a reset valuation. Starting a position at these levels, under $75 per share, appears to offer an attractive entry point for long-term investors.
That said, it will be imperative to watch developments in data center spending, particularly among the hyperscalers. The cadence of demand will become clearer with upcoming Q1 earnings, both from Vertiv and its peers in the AI infrastructure space. Management’s commentary on demand and order activity will be a key signal as to whether the current visibility holds, or if we should expect further volatility ahead.
Disclosure: I have a long equity position in Vertiv.
