Which stock benefited most from 2023’s boom in Generative AI? If you thought the winner is Santa Clara, Calif.-based Nvidia — the chip designer with 85% of the market for the GPUs that power ChatGPT and other large language models — you would be wrong.
The right answer is Vertiv — a provider of power-management and cooling equipment for data centers — located in Westerville, Ohio.
While Nvidia stock — up 246% in 2023 — came in second place in my Generative AI Stock Index, Vertiv shares led the pack by popping 269% this year.
Is it too late for you to buy Vertiv stock? I don’t know for sure — but it’s clearly a leader in a fast-growing industry being propelled by demand for the LLMs that power Generative AI.
The Generative AI Stock Index
Before getting into all that, let’s take a look at the GAISI. It keys off Brain Rush — a book I am writing about Generative AI — part of which explores how to invest and compete in the Generative AI business ecosystem powering those buzzy chatbots.
The GAISI — which rose 82% in 2023 compared to 43% for the Nasdaq Composite — tracks a subset of publicly-traded stocks in five industries supporting Generative AI.
Below I list the GAISI’s industry components and provide the stock market performance of the average company I tracked in each:
- Generative AI consulting: +30%
- Generative AI software: +91%
- Generative AI cloud services: +70%
- Generative AI hardware: +135%
For now, I will set aside a discussion of which companies are included in each sub-industry and why Generative AI hardware stocks did better than the other four.
I will say the hardware category includes Nvidia and Vertiv — both of which were the only companies whose shares increased more than 200% in 2023.
What Vertiv Makes And Why It Wins
Vertiv has undergone many corporate transformations before emerging as a leading beneficiary of the Generative AI boom.
Vertiv was formerly the network-power business of Emerson ElectricEMR built with help from the 2010 acquisition for $1.5 billion of Chloride Group. Emerson later took a $508 million writedown on that deal – causing its former CEO Dave Farr to express his regret for getting into the industry, according to Bloomberg.
Emerson acquired the business in 2016 and sold it to Platinum Equity for $4 billion. In 2020, the business – called Vertiv – went public by merging with a Goldman Sachs-led special purpose acquisition company. Vertiv’s Executive Chair Dave Cote had previously served as CEO of Honeywell, Bloomberg noted, and as an executive at GE.
In 2023, Vertiv was a major beneficiary of data centers’ need to cool off the GPU-laden computing systems used to train and operate LLMs. As Bank of AmericaBAC analyst Andrew Obin wrote in a June 2023 report, a 10% increase in power use would require “a more than 10% increase in electrical-equipment capacity because of the need for redundant infrastructure to help guard against power failures,” Bloomberg reported.
Higher power means more heat generated – creating demand for equipment to cool down the servers to ambient temperature. Vertiv’s liquid cooling systems solved the problem of overheated data centers very effectively. In June 2023, Vertiv was struggling to satisfy demand for its products from data centers processing Generative AI workloads.
About a third of Vantiv’s revenue came from hyperscale data-center customers – considerably higher than the single-digit percentages at larger rivals such as Eaton and Schneider, noted Obin.
Vertiv’s Generative AI Products
Vertiv provided immersive cooling systems and other products for data centers hosting Generative AI applications. The level of densely packed servers doing calculations all day long boosted the amount of heat that data centers needed to remove in order to keep the equipment from overheating, I wrote in November.
Liquid cooling — which circulates water or other coolants through heat exchangers to absorb the heat generated by computer components — is more efficient than fans or air conditioning, KPMG Managing Director Brian Lewis said.
Despite the advantage, data center operators need to make sure their buildings can handle the added weight of liquid cooling products. “Liquid cooling adds weight because it is sitting on the floor and is embedded into the circuit boards,” Forrester ResearchFORR senior analyst Abhijit Sunil told me in November. “It is heavier than air cooled which has big fans blowing in the data center.”
To satisfy the demands Generative AI places on data centers, Vertiv offers products including the following:
- Immersive cooling. In December 2023, Vertiv announced it would provide liquid cooling to Intel’sINTC Gaudi AI accelerator, according to Network World. Vertiv’s liquid cooling product was able to handle four times the power and much higher temperatures than air-cooled solutions. Vertiv’s pumped two-phase liquid cooling product used a low power pump to move non-toxic refrigerant through cold plates attached directly to the chip. Vertiv’s P2P system transfers heat from the chips to the fluid by changing phases from liquid to gas. The system captures and cools the gas – turning it back into a liquid – thus reducing or eliminating a data center’s need for chillers. Intel’s Devdatta Kulkarni, principal engineer, said Vertiv’s P2P system would help Intel Gaudi AI accelerator customers to “meet critical sustainability goals,” Network World reported
- Microgrids. Since Generative AI required more power, data center operators needed to anticipate the capacity and availability limitations of traditional electric utilities. To address this, Vertiv collaborated with American ElectricAEP Power to implement the microgrid application. Microgrids meet the power needs of processing Generative AI while reducing data centers’ dependency on the electrical grid for power capacity and availability, according to Data Center News. They also presented an alternative to frequent diesel generator backups. Vertiv’s microgrids reduced the risk to data centers of electric utility outages by supplementing the electrical utility with solar arrays and hydrogen fuel cells, Data Center News reported.
Vertiv’s Financial Performance And Prospects
In 2023, Vertiv’s performance and prospects appeared strong. However, the trajectory of its stock price depended on whether the company continued to exceed investor expectations. Vertiv had two things going in its favor:
- The liquid cooling industry was growing quickly – propelled in part by demand for Generative AI. Liquid cooling represented a fast-growing market opportunity. According to Polaris Market Research, the global data center liquid cooling market was valued at $1.81 billion in 2021 and expected to grow at a 24% average annual rate over through 2026, I noted in November.
- Vertiv dominated its industry. In its third quarter of 2023, Vertiv posted better-than-expected results and provided investors with an ambitious forecast for the year. Specifically, revenue increased about 18% to $1.74 billion and analysts expected nearly 20% growth for the company in fiscal 2023 to $6.82 billion. Moreover, Vertiv’s earnings per share grew 126% in the third quarter of 2023 and analysts expected the company’ EPS to rise by 203% in fiscal 2023, I noted last month.
In 2023, Wall Street analysts were optimistic about Vertiv stock. Deutsche Bank wrote, “Vertiv clearly caught the AI wave,” in a Sept. 14 research note. The firm — which raised its price target to $48 per share — saw potential for over 50% further upside “if data center investments continue growing at a double-digit clip,” I wrote in November.
Meanwhile, EvercoreEVR ISI saw Vertiv as an industry leader. In an October 1 investor note, the firm wrote the company “has the top market share for thermal management solutions and is a powerhouse in the arena.” Evercore added the company’s association with Leibert — the inventor of precision cooling — gave Vertiv an advantage over rivals such as Eaton and APC.
Moreover, Evercore — which set a $50 price target on the company’s shares — noted Vertiv offers contracts on energy savings “to earn higher payouts, if a higher percentage of operating expenses is saved,” I noted last month.
Vertiv was optimistic about its future. The company expected strong demand for products related to Generative AI as well as products to help data centers handle more traditional processing. If we talk about technologies that are applied to high-density GPU or compute, as for example, liquid cooling, GPUs or some rack-level power distribution solutions. I will still say our order book is in the tens of millions of dollars,” Vertiv CEO Giordano Albertazzi told investors in October.
He added, “Many elements of our portfolio, chillers, direct expansion cooling, heat rejection systems, switchgear, busbars, UPS, you name them are used — regardless if GPU or CPU compute, high density or normal density. The majority of our products will support many types of compute, including AI. That is the beauty of having a comprehensive portfolio of all critical infrastructure technologies, across the entire span of the powertrain, the thermal chain and IT-wide space infrastructure, something that very few companies truly have.”
Although Nvidia — its revenue soared 205% in the third quarter — is growing much faster than Vantiv, the chip giant faces headwinds due to U.S. limitations on the power of the chips it can ship to China. That could make it difficult for Nvidia to keep up that rapid growth pace.
Vantiv expects 20% revenue growth and could grow even faster than that.
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Eugen Boglaru is an AI aficionado covering the fascinating and rapidly advancing field of Artificial Intelligence. From machine learning breakthroughs to ethical considerations, Eugen provides readers with a deep dive into the world of AI, demystifying complex concepts and exploring the transformative impact of intelligent technologies.
