HSBC is bullish on Vertiv (VRT.US): data center power and cooling sector is a "pure play" target, initiates coverage with a "buy" rating

As investors' enthusiasm for artificial intelligence (AI) infrastructure continues to rise, supported by optimistic outlook from HSBC, the stock price of leading liquid cooling company Vertiv Holdings (VRT.US) rose to a historic high in mid-week trading. HSBC initiated coverage of Vertiv with a "buy" rating and a target price of $325, representing nearly an 18% upside from the closing price of $276.16 on Wednesday. HSBC believes that Vertiv is a "pure play" in the data center power and cooling sector, positioning itself in one of the fastest growing segments within the AI supply chain. AI capital expenditure surge driving equipment demand HSBC predicts that the capital expenditure of hyper-scale cloud service providers will accelerate significantly, forecasting a 91% growth in U.S. cloud computing capital spending by 2026 driven by AI. This surge in expenditure will directly a rise in demand for infrastructure equipment, especially in the areas of power management and cooling systems. Analysts estimate that the total addressable market for power and cooling equipment will reach approximately $156 billion by 2026, representing a 67% year-on-year growth. This reflects both the increasing computational intensity and the rising complexity of data center designs. Vertiv holds a competitive advantage as an integrated supplier HSBC favors vertically integrated suppliers and believes that Vertiv, Eaton Corp. Plc (ETN.US), and Schneider Electric are best positioned to benefit from the evolution of data center architectures. Vertiv has a strong presence in both power systems and thermal management systems, with approximately 80% of its revenue coming from data center related businesses, making it one of the highest among its peers. This positioning allows Vertiv to participate in multiple key aspects of data center construction, from uninterruptible power supply systems to cooling technologies. Order growth and backlog demonstrate strong demand The report emphasizes Vertiv's recent strong business momentum. The company saw a 252% year-on-year growth in orders in the fourth quarter, with a backlog increase of over 50% quarter-on-quarter. HSBC states that these trends reflect the scale and urgency of purchases by hyper-scale cloud providers as they accelerate deployments to support AI workloads. Transition to higher power density and liquid cooling technology HSBC predicts that the next phase of data center evolution will require significantly higher power density, with rack power requirements expected to increase from the current approximately 10 kilowatts to about 1 megawatt required by next-generation chips. This shift is driving the rapid adoption of liquid cooling technology. HSBC believes that this is the fastest-growing segment within the thermal management sector, and expects cooling solutions to account for an increasing share of overall infrastructure spending. Vertiv has expanded its capabilities through acquisitions, including the acquisition of liquid cooling specialist CoolTera, positioning itself to benefit from this transformative trend. Technological architecture changes bring additional opportunities HSBC also points out that long-term changes in power architecture will present opportunities, including a potential transition to 800 volt direct current systems in the future. Although this transition is still in the early stages, it may reshape the competitive landscape and favor suppliers with expertise in multiple voltage levels and system components. Meanwhile, grid infrastructure bottlenecks and long delivery cycles for high-voltage equipment are reinforcing the demand for integrated solutions, including on-site power generation and advanced distribution systems. Valuation reflects growth expectations, but still has upside potential Vertiv's valuation is higher than many of its industrial peers, reflecting its exposure to high-growth end markets. HSBC estimates that the company's valuation is approximately 28.6 times the expected enterprise value to EBITDA ratio for 2026, and approximately 40 times the expected price-to-earnings ratio. Despite this, the institution believes that the growth prospects are sufficient to support this valuation level, pointing out the company's strong return metrics and sustained clear demand visibility. Structural demand trends support future prospects In conclusion, HSBC believes that the AI infrastructure cycle is still in its early stages, with current spending being more constrained by execution capabilities rather than demand constraints. As global data center construction accelerates and workloads continue to expand, key power and cooling equipment suppliers are expected to continue to see order growth. Within this group, Vertiv, with its highly focused business structure and integrated product capabilities, is poised to be one of the significant beneficiaries of this trend.