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Which stocks benefited the most from the generative AI boom in 2023? The winner was Santa Clara, Calif.-based Nvidia, a chip design with 85% of the GPU market that powers ChatGPT and other large language models. company), you are wrong.
The correct answer is Vertiv in Westerville, Ohio. Vertiv is a provider of power management and cooling equipment for data centers.
Nvidia stock (up 246% in 2023) ranks second in my Generative AI stock index, while Vertiv stock is up 269% this year and leads the pack in my GAISI.
Is it too late to buy Vertiv stock? We don’t know for sure, but it’s clear that it’s a leader in an industry that’s booming due to demand for LLMs powered by generative AI.
Generative AI Stock Index
Before we get into it, let’s take a look at GAISI.key off brain rush — a book I’m writing about generative AI — part of which explores how to invest in and compete in the generative AI business ecosystem that powers these thriving chatbots.
GAISI (up 82% in 2023 compared to 43% for the Nasdaq Composite Index) takes into account a portion of publicly traded stocks in five industries that support generative AI.
Below we define GAISI’s industry components and show the stock market performance of the average company tracked in each industry.
- Generative AI consulting: +30%
- Generating AI software: +91%
- Generative AI cloud services: +70%
- Generated AI hardware: +135%
For now, we’ll set aside arguments about which companies are included in each sub-industry and why the generative AI hardware stock fared better than the other four.
The hardware category includes Nvidia and Vertiv. Both companies were the only companies whose stock prices rose more than 200% in 2023.
What does Vertiv do and why is it successful?
Vertiv has gone through a number of corporate transformations before emerging as a major beneficiary of the generative AI boom.
Vertiv, formerly Emerson ElectricEMR’s network power business, was founded with support from the $1.5 billion acquisition of Chloride Group in 2010. Emerson later reported that it took a $508 million writedown on the deal, and former CEO Dave Farr expressed regret for entering the industry. bloomberg.
Emerson acquired the business in 2016 and sold it to Platinum Equity for $4 billion. In 2020, the business, called Vertiv, went public through a merger with a special acquisition vehicle led by Goldman Sachs. Vertiv’s CEO, Dave Cote, previously served as CEO of Honeywell. bloomberg pointed out as a GE executive.
In 2023, Vertiv benefited greatly from data centers’ needs to cool GPU-rich computing systems used for LLM training and operations. As Bank of America BAC analyst Andrew Aubin wrote in a June 2023 report, a 10% increase in electricity usage “will require redundant infrastructure to prevent outages. Therefore, it is necessary to increase the capacity of electrical equipment by at least 10%. bloomberg report.
Higher power also generates more heat, creating a demand for equipment to cool the server to ambient temperature. Vertiv’s liquid cooling system has very effectively solved the problem of overheating in data centers. In June 2023, Vertiv was struggling to meet demand for its products for data centers that handle generative AI workloads.
About a third of Vantiv’s revenue comes from hyperscale data center customers, which is significantly higher than the single-digit percentages of larger competitors such as Eaton and Schneider, Aubin said.
Vertiv Generated AI Products
Vertiv provided immersive cooling systems and other products for data centers hosting generative AI applications. He wrote in November that dense servers performing computations all day long have increased the amount of heat that data centers need to remove to prevent equipment from overheating.
KPMG managing director Brian Lewis said liquid cooling, which circulates water or other refrigerant through a heat exchanger to absorb heat generated by computer components, is more efficient than fans or air conditioning.
Despite these benefits, data center operators must ensure that their buildings can withstand the added weight of liquid cooling. “Liquid cooling is on the floor and embedded in the circuit board, which adds weight,” Abhijit Sunil, senior analyst at Forrester ResearchFORR, told me in November. “It’s heavier than an air-cooled system that spins a large fan inside the data center.”
To meet the demands that Generative AI places on data centers, Vertiv offers the following products:
- Immersive cooling. According to , Vertiv announced in December 2023 that it would provide liquid cooling for Intel’s INTC Gaudi AI accelerator. network world. Vertiv’s liquid cooling products were able to handle four times more power and much higher temperatures than air-cooled solutions. Vertiv’s pumped two-phase liquid cooling products used a low-power pump to move non-toxic refrigerant through a cold plate attached directly to the chip. Vertiv’s P2P system transferred heat from the chip to the fluid by changing the phase from liquid to gas. The system captures gas, cools it, and turns it back into a liquid, reducing or eliminating the need for data center cooling equipment. Intel principal engineer Devdatta Kulkarni said that Vertiv’s P2P system will help customers of the Intel Gaudi AI accelerator “achieve important sustainability goals.” network world report
- Microgrid. Because Generative AI requires more power, data center operators have had to anticipate the capacity and availability limitations of traditional power providers. To address this, Vertiv worked with American ElectricAEP Power to implement a microgrid application. According to , microgrids reduce a data center’s dependence on the power grid for power capacity and availability while meeting the power needs needed to process generative AI. data center news. They also presented an alternative to frequent diesel generator backups. Vertiv’s microgrid reduced the risk to the data center from utility outages by supplementing the utility with solar arrays and hydrogen fuel cells. Data Center News reported.
Vertiv’s financial performance and outlook
In 2023, Vertiv’s performance and outlook looked solid. But the stock’s trajectory depended on whether the company continued to exceed investor expectations. However, Vertiv had two advantages for him.
- The liquid cooling industry was growing rapidly, driven in part by the demand for generative AI. Liquid cooling represented a rapidly growing market opportunity. I noted in November that the global data center liquid cooling market was valued at $1.81 billion in 2021 and is expected to grow at an average annual rate of 24% through 2026, according to Polaris Market Research. .
- Vertiv dominated the industry. In the third quarter of 2023, Vertiv announced better-than-expected results and provided investors with an ambitious forecast for the year. Specifically, sales rose about 18% to $1.74 billion, and analysts had expected the company’s growth rate in fiscal 2023 to be nearly 20% to $6.82 billion. Additionally, Vertiv’s earnings per share grew 126% in Q3 2023, and I noted last month that analysts expect the company’s EPS to increase 203% in fiscal 2023.
In 2023, Wall Street analysts were optimistic about Vertiv stock. “Vertiv has clearly caught the AI wave,” Deutsche Bank wrote in a September 14 research note. The company raised its price target to $48 per share, and I wrote in November that it could rise another 50% or more “if data center investments continue to grow at double-digit rates.”
Meanwhile, EvercoreEVR ISI recognized Vertiv as an industry leader. In a note to investors dated Oct. 1, the company wrote that it is “a leading player in this field with a leading market share in thermal management solutions.” Evercore added that his ties to Leibert, the inventor of precision cooling, gave his Vertiv an advantage over rivals such as Eaton and his APC.
Additionally, Evercore, which has set a $50 price target on the company’s stock, says Vertiv offers energy savings contracts “to earn higher dividends if a higher percentage of operating expenses are saved.” pointed out last month.
Vertiv was optimistic about its future. The company expected strong demand for products related to generative AI, as well as products that enable data centers to handle more traditional processing. When we talk about high-density GPUs or technologies that apply primarily to computing, examples include liquid cooling, GPUs, or some rack-level power distribution solutions. I would still like to say that our order backlog 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, thermal isolation systems, switchgear, busbars, UPS, you name it, whether it’s GPU or CPU computing, high density or regular density. The majority of our products support different types of computing, including AI. That’s the beauty of having a comprehensive portfolio of critical infrastructure technologies, and very few companies truly have this.”
Nvidia, whose revenue soared 205% in the third quarter, is growing at a much faster pace than Vantiv, but the chip giant faces headwinds due to U.S. restrictions on its ability to ship chips to China. . Therefore, it may be difficult for NVIDIA to maintain its rapid growth pace.
Vantiv expects revenue growth of 20% and could grow even faster than that.
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