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AkhenOsiris RT @RadnorCapital: Bullish Vertiv $VRT initiation at Morgan Stanley - summary below: He says the opportunity is too attractive to ignore and the stock is trading at the lowest growth adj multiple across his universe w/ best-in-class revisions…
2025 period. This comes on top of a >100% increase in capacity over 2021-2023. And they recently opened a new manufacturing facility in India for thermal management products for domestic and international markets. This follows the opening of a thermal manufacturing facility in Mexico early in 2023. And at its recent investor day, management raised medium-term capex guidance to 2.0-2.5% of revenue, from an average of 1.6% over 2019-2022 period. This capacity expansion is obviously rooted in the belief that demand is durable and sustainable (similar to Super Micro’s comments of taking capacity to ~$30bn from low teens today). A general rule of thumb is that if volume of data goes up 10%, we generally will see 3-5% increase in the volume of gear to ensure adequate power supply.
Many of these AI benefits are yet to flow through to Vertiv, particularly around liquid cooling. There are several reasons for this:
The market for cooling infrastructure is gradually transitioning from air cooling (where Vertiv is currently the leader) to liquid cooling (which is Vertiv’s to lose). Super Micro’s CEO said on the last earnings call: “You are right. In these current 600 watt / 700 watt modules, people can still do well with air conditioning. And that's why people still are comfortable with our traditional air cooler. But when that system grows to 1,000 or even 1,000 watt per module, yes. I mean -- I think cooling becomes even much more critical.” Basically as power / compute demands increase, there is a need for more heavy duty cooling direct to the chip / rack. Super Micro CEO then said: “I anticipate that up to 20% or more of global data centers will transition to liquid-cooled solutions in just a few years.” So we are early days. Important to note that liquid cooling will largely be additive to Vertiv’s business – down the road ~1/3 of thermal cooling will still be from air cooling – liquid cooling does a great job taking heat away from the chip and rack but it still needs to be moved and expelled from the building. For example, traditional compute requires 6 computer room air conditioners vs. 10 for high density compute. As we move toward Nvidia’s next chip (B100), more cooling capability will be required. The industry was growing high single digits prior to liquid cooling – so growth with liquid cooling is obviously higher.
Additionally, new AI data centers take time to permit, build, etc. and even existing data centers are only turned on with half – 2/3 capacity, which illustrates why the demand curve could be longer and more durable than the market appreciates.
A few comments from management on the last earnings call: “still very early in AI opportunity – its barely started.” “AI will show up in more pronounced manner in 2024.” “More demand than capacity in industry.” Longevity of current order inflection: “Believe this is a long term trend – multi year cycle – this is just the beginning”
As I mentioned, Vertiv is the largest pure play, with other competitors like Schneider $SCHN, Eaton and Stulz $STULZZ, as well as a long tail of independents (still ~50% of market). As hyper scalers continue to drive AI data center demand, there are only a few players that can service this demand.
Scale and service excellence matter when dealing with hyper scalers (they want someone to hold their hand). Ecolab $ECL has a similar competitive advantage. Vertiv’s product offering is good, not great, but their ability to service customers and be a one stop shop / systems integrator for power, precision cooling and other infrastructure management systems is what sets them apart. For example, you don’t want several different teams in your data center, you want one team doing power, air cooling, liquid cooling, etc. This is why Vertiv has the prime position and this is why it is theirs to lose.
There are also several startups working on liquid cooling technologies – these starts up could never service the needs of a hyper scale data center – so the natural move is for Vertiv to buy the[...]
Many of these AI benefits are yet to flow through to Vertiv, particularly around liquid cooling. There are several reasons for this:
The market for cooling infrastructure is gradually transitioning from air cooling (where Vertiv is currently the leader) to liquid cooling (which is Vertiv’s to lose). Super Micro’s CEO said on the last earnings call: “You are right. In these current 600 watt / 700 watt modules, people can still do well with air conditioning. And that's why people still are comfortable with our traditional air cooler. But when that system grows to 1,000 or even 1,000 watt per module, yes. I mean -- I think cooling becomes even much more critical.” Basically as power / compute demands increase, there is a need for more heavy duty cooling direct to the chip / rack. Super Micro CEO then said: “I anticipate that up to 20% or more of global data centers will transition to liquid-cooled solutions in just a few years.” So we are early days. Important to note that liquid cooling will largely be additive to Vertiv’s business – down the road ~1/3 of thermal cooling will still be from air cooling – liquid cooling does a great job taking heat away from the chip and rack but it still needs to be moved and expelled from the building. For example, traditional compute requires 6 computer room air conditioners vs. 10 for high density compute. As we move toward Nvidia’s next chip (B100), more cooling capability will be required. The industry was growing high single digits prior to liquid cooling – so growth with liquid cooling is obviously higher.
Additionally, new AI data centers take time to permit, build, etc. and even existing data centers are only turned on with half – 2/3 capacity, which illustrates why the demand curve could be longer and more durable than the market appreciates.
A few comments from management on the last earnings call: “still very early in AI opportunity – its barely started.” “AI will show up in more pronounced manner in 2024.” “More demand than capacity in industry.” Longevity of current order inflection: “Believe this is a long term trend – multi year cycle – this is just the beginning”
As I mentioned, Vertiv is the largest pure play, with other competitors like Schneider $SCHN, Eaton and Stulz $STULZZ, as well as a long tail of independents (still ~50% of market). As hyper scalers continue to drive AI data center demand, there are only a few players that can service this demand.
Scale and service excellence matter when dealing with hyper scalers (they want someone to hold their hand). Ecolab $ECL has a similar competitive advantage. Vertiv’s product offering is good, not great, but their ability to service customers and be a one stop shop / systems integrator for power, precision cooling and other infrastructure management systems is what sets them apart. For example, you don’t want several different teams in your data center, you want one team doing power, air cooling, liquid cooling, etc. This is why Vertiv has the prime position and this is why it is theirs to lose.
There are also several startups working on liquid cooling technologies – these starts up could never service the needs of a hyper scale data center – so the natural move is for Vertiv to buy the[...]
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2025 period. This comes on top of a >100% increase in capacity over 2021-2023. And they recently opened a new manufacturing facility in India for thermal management products for domestic and international markets. This follows the opening of a thermal manufacturing…
m. At ~2x net leverage and a cash generative business model, they are positioned to make this happen.
We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out Vertiv as the world leader, saying their collaboration is growing in leaps and bounds and that their partnership is more important than ever.
Numbers / estimates higher at a reasonable valuation = stock higher. Simple model summary and valuation snapshot below. These are base case estimates and I don’t expect them to guide to what I am expecting right away on the Q4 call. I also reserve the right to revise my estimates as the data suggests - likely higher.
Starting with Q4 – management said to expect a similar growth rate in Q4 as in Q3. We saw 18% growth in Q3 and the street is at ~14% growth for Q4. Either people aren’t paying attention, or they don’t trust management. I trust that this management team will continue to be conservative with the hopes of creating a consistent beat / raise story.
At the investor day in November 2023, management gave “very preliminary” 2024 guidance of 8-11% sales growth and operating margins 16.5-16.9%, with 83-87% FCF conversion. Given the “very preliminary” comment its clear that this is more a floor than a ceiling. The street is at ~10% growth for 2024 and has it slowing to HSD in 2025 and 2026.
Important to note that Vertiv’s growth has largely been US driven (grew >40% in 2023). And while this is where most of the AI investment is taking place, international markets will eventually pick up – this is another advantage of Vertiv’s global footprint. Vertiv grew >20% in 2023, despite APAC down ~5% (macro weakness in China) and EMEA only up high single digits.
Additionally, management has said incremental margins (margins on incremental revenue that flows through) are currently ~30%, but will move toward ~35% as the liquid cooling investments start to bear fruit. As you can see in my model summary, I can get to >20% operating margins in 2026 (managements long term guidance is 20%+ operating margins sometime in 2026-2028 period).
Backlog is also at record levels ~$5bn, which tells you >3/4 of the year is already accounted for. And again, I expect orders to grow faster than sales through 2024, leading to another record backlog number on the horizon. Importantly, management spoke to taking ~5% pricing in their backlog, which tells me pricing could be up mid single digits again this year. Historically this has been a flat to down ~1% annually pricing business, but the demand environment has changed this and I expect it to last for several years before mean reverting. Management has said they expect to be price / cost positive on a go forward basis.
Balance sheet is healthy, which will allow them to paydown debt, buyback stock and make bolt on technology acquisitions. Current debt structure is $850mm fixed rate bond 4.125% due October 2028 and a $2.1bn term loan due March 2027. The term loan is split between $1.1bn at variable rate currently ~8% (focus is to pay this down over next two years, which should allow them to accelerate capital deployment) and $1bn fixed ~4%. Vertiv also has authorization to buyback $3bn worth of stock over the next 4 years (~15% of market cap).
The stock currently trades ~20x EV / operating profit (I’m using this metric because this is what they guide to). I’m assuming this multiple holds, which it will as long as numbers / estimates go higher. There is no pure play comp, but Eaton trades ~23x and Amphenol trades ~22x (also a low double-digit growth with >30% incremental margins). As I look out a few years, I can still get to meaningful upside, despite the recent run in the stock (see below).
The key risk is that AI investment / capex slows. Additionally, Vertiv could lose market share if they don’t continue to innovate / buy the innovators. They could also make execution errors, which they did early in Covid under a different management t[...]
We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out Vertiv as the world leader, saying their collaboration is growing in leaps and bounds and that their partnership is more important than ever.
Numbers / estimates higher at a reasonable valuation = stock higher. Simple model summary and valuation snapshot below. These are base case estimates and I don’t expect them to guide to what I am expecting right away on the Q4 call. I also reserve the right to revise my estimates as the data suggests - likely higher.
Starting with Q4 – management said to expect a similar growth rate in Q4 as in Q3. We saw 18% growth in Q3 and the street is at ~14% growth for Q4. Either people aren’t paying attention, or they don’t trust management. I trust that this management team will continue to be conservative with the hopes of creating a consistent beat / raise story.
At the investor day in November 2023, management gave “very preliminary” 2024 guidance of 8-11% sales growth and operating margins 16.5-16.9%, with 83-87% FCF conversion. Given the “very preliminary” comment its clear that this is more a floor than a ceiling. The street is at ~10% growth for 2024 and has it slowing to HSD in 2025 and 2026.
Important to note that Vertiv’s growth has largely been US driven (grew >40% in 2023). And while this is where most of the AI investment is taking place, international markets will eventually pick up – this is another advantage of Vertiv’s global footprint. Vertiv grew >20% in 2023, despite APAC down ~5% (macro weakness in China) and EMEA only up high single digits.
Additionally, management has said incremental margins (margins on incremental revenue that flows through) are currently ~30%, but will move toward ~35% as the liquid cooling investments start to bear fruit. As you can see in my model summary, I can get to >20% operating margins in 2026 (managements long term guidance is 20%+ operating margins sometime in 2026-2028 period).
Backlog is also at record levels ~$5bn, which tells you >3/4 of the year is already accounted for. And again, I expect orders to grow faster than sales through 2024, leading to another record backlog number on the horizon. Importantly, management spoke to taking ~5% pricing in their backlog, which tells me pricing could be up mid single digits again this year. Historically this has been a flat to down ~1% annually pricing business, but the demand environment has changed this and I expect it to last for several years before mean reverting. Management has said they expect to be price / cost positive on a go forward basis.
Balance sheet is healthy, which will allow them to paydown debt, buyback stock and make bolt on technology acquisitions. Current debt structure is $850mm fixed rate bond 4.125% due October 2028 and a $2.1bn term loan due March 2027. The term loan is split between $1.1bn at variable rate currently ~8% (focus is to pay this down over next two years, which should allow them to accelerate capital deployment) and $1bn fixed ~4%. Vertiv also has authorization to buyback $3bn worth of stock over the next 4 years (~15% of market cap).
The stock currently trades ~20x EV / operating profit (I’m using this metric because this is what they guide to). I’m assuming this multiple holds, which it will as long as numbers / estimates go higher. There is no pure play comp, but Eaton trades ~23x and Amphenol trades ~22x (also a low double-digit growth with >30% incremental margins). As I look out a few years, I can still get to meaningful upside, despite the recent run in the stock (see below).
The key risk is that AI investment / capex slows. Additionally, Vertiv could lose market share if they don’t continue to innovate / buy the innovators. They could also make execution errors, which they did early in Covid under a different management t[...]
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m. At ~2x net leverage and a cash generative business model, they are positioned to make this happen. We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out…
eam.
Vertiv also serves certain telecom end markets, which have slowed post heavy 5G investments. However, this is a small part of the overall business (and getting smaller given data center growth). - Radnor Capital tweet
Vertiv also serves certain telecom end markets, which have slowed post heavy 5G investments. However, this is a small part of the overall business (and getting smaller given data center growth). - Radnor Capital tweet
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Stock Analysis Compilation
Royce IP on Transcat $TRNS US
Thesis: Transcat's focus on scalable services, automation, and strategic acquisitions positions it for significant market share growth in high-value sectors
(Extract from their article) https://t.co/7T2b1GzT4y
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Royce IP on Transcat $TRNS US
Thesis: Transcat's focus on scalable services, automation, and strategic acquisitions positions it for significant market share growth in high-value sectors
(Extract from their article) https://t.co/7T2b1GzT4y
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Startup Archive
Peter Thiel on what he would look for if he was joining a startup
Wharton professor Adam Grant asks Peter Thiel what he would look for if he was joining an early-stage startup. Thiel gives a simple response:
“Do you like the people? Do you think you could become good friends with these people? That’s such a critical part for getting these things to work.”
He recalls interviewing with a law firm in New York early in his career and one partner telling him:
“It’s a place where everybody hates everybody else, but we all make lots of money.”
The partner viewed it as an illustration of how incredibly “professional” the firm was. But Thiel argues that we need more than just “professional” at work.
Thiel elaborates more on this idea in his book Zero to One:
“Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.”
Video source: @Wharton (2014)
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Peter Thiel on what he would look for if he was joining a startup
Wharton professor Adam Grant asks Peter Thiel what he would look for if he was joining an early-stage startup. Thiel gives a simple response:
“Do you like the people? Do you think you could become good friends with these people? That’s such a critical part for getting these things to work.”
He recalls interviewing with a law firm in New York early in his career and one partner telling him:
“It’s a place where everybody hates everybody else, but we all make lots of money.”
The partner viewed it as an illustration of how incredibly “professional” the firm was. But Thiel argues that we need more than just “professional” at work.
Thiel elaborates more on this idea in his book Zero to One:
“Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.”
Video source: @Wharton (2014)
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Startup Archive
RT @ancerj: Look at Europe. The default of civilization is decadently demanding resources be spent *now* on pet projects, retirement, "quality of life;" not on a better future that verbalists will call unreasonable, unsustainable, unequal.
It takes bold live players to halt that dynamic.
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RT @ancerj: Look at Europe. The default of civilization is decadently demanding resources be spent *now* on pet projects, retirement, "quality of life;" not on a better future that verbalists will call unreasonable, unsustainable, unequal.
It takes bold live players to halt that dynamic.
Elon Musk: “Technology does not automatically improve”
“People are mistaken when they think that technology just automatically improves. It does not automatically improve. It only improves if a lot of people work very hard to make it better. And actually it will I think—by itself—degrade.”
Elon continues:
“If you look at the progress in space, in 1969 we were able to send somebody to the moon. Then we had the Space Shuttle. The Space Shuttle could only take people to low-earth orbit. Then the Space Shuttle retired and the United States could take no one to orbit.”
This is why he believe SpacEx’s mission of making humans a space-faring civilization is so important. It’s not inevitable, and it will require a lot of talented people working really hard to make it happen.
“You look at great civilizations like ancient Egypt, and they were able to make the pyramids, and they forgot how to do that. And the Romans, they built these incredible aqueducts. They forgot how to do it.”
Video source: @TEDTalks (2017) tweet
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Quiver Quantitative
BREAKING: Senator Shelley Moore Capito just disclosed a purchase of stock in GE Aerospace, $GE.
GE Aerospace makes jet engines for military aircraft.
Capito sits on the Senate Appropriations Subcommittee on Defense, which oversees defense spending. https://t.co/CamVzQV09F
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BREAKING: Senator Shelley Moore Capito just disclosed a purchase of stock in GE Aerospace, $GE.
GE Aerospace makes jet engines for military aircraft.
Capito sits on the Senate Appropriations Subcommittee on Defense, which oversees defense spending. https://t.co/CamVzQV09F
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Investing visuals
Geopolitical tension is one of the main risks that $ASML is facing. Here's a breakdown of its revenue by geography 👇 https://t.co/mCJVzJwEoy
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Geopolitical tension is one of the main risks that $ASML is facing. Here's a breakdown of its revenue by geography 👇 https://t.co/mCJVzJwEoy
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Stock Analysis Compilation
THB AM on Hawkins $HWKN US
Thesis: Hawkins leverages strategic acquisitions and cost synergies to dominate niche markets and drive robust cash flow growth
(Extract from their Q3 letter) https://t.co/ijuXHQwOsy
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THB AM on Hawkins $HWKN US
Thesis: Hawkins leverages strategic acquisitions and cost synergies to dominate niche markets and drive robust cash flow growth
(Extract from their Q3 letter) https://t.co/ijuXHQwOsy
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Quiver Quantitative
RT @QuiverCongress: JUST IN: Representative @VernBuchanan has introduced legislation to make daylight savings time permanent.
Follow here for updates. https://t.co/YuYewvKbQt
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RT @QuiverCongress: JUST IN: Representative @VernBuchanan has introduced legislation to make daylight savings time permanent.
Follow here for updates. https://t.co/YuYewvKbQt
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