We recently compiled a list of the 20 Industrial Stocks Already Riding the AI Wave. In this article, we are going to take a look at where nVent Electric plc (NYSE:NVT) stands against the other industrial stocks that are already riding the AI wave.
When investors think of artificial intelligence (AI), they usually relate the thought to prominent hardware and software companies working in the technology sector. However, a much wider understanding of AI is needed in order to pick out the best stocks that are likely to ride the AI wave as it evolves over time. Contrary to public opinion, one of the smartest ways of jumping on the AI bandwagon is by playing the industrial sector. Since the start of 2023, the beginning of the AI boom in other words, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. According to a Goldman Sachs study on the matter, in the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
In addition to the obvious picks in the semiconductor space, investors should turn their attention towards industrial firms that provide construction, engineering, electronics, cooling, and connectivity services. Even though these firms derive only a portion of their revenue from AI at the present, the explosive growth potential of AI can be a meaningful driver of their revenues in the coming months. Indeed, some indications of this can be gleaned from the fact that industrial firms linked to AI grew their revenues by almost 15% last year. This number is comfortably above their non-AI peers and the S&P 500 average for 2023. Industrial firms help manage the computational powers of AI data centers, make high speed connections possible, and also make sure they operate at optimal temperatures.
Lazar Naiker, an analyst at capital markets firm AGF Investments, explains how traditional data centers are different from AI ones. Essentially, AI data centers are powered by graphic processing units (GPUs), while their traditional counterparts are powered by central processing units (CPUs). GPUs operate at a faster speed and thus need higher bandwidth cables for communication with other GPUs. There is a 10 to 1 difference in the number of cables needed to power GPUs and CPUs. AI applications require constant communication between data center GPUs as well, the development of neural networks, so to speak, whereas this is not the case for CPUs. Another key difference is power consumption. Per Naiker, the GPU uses almost 5 times the power required by a CPU.
Our Methodology
For this article, we selected industrial stocks that posted more than 25% gains in 2024. From this list, we selected firms that have links to the AI universe and approximated percentage revenues based on these links. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A workman standing next to a newly constructed wall, showcasing the company’s electrical enclosures.
nVent Electric plc (NYSE:NVT)
Number of Hedge Fund Holders: 61
YTD Return as of August 1: 24%
Approximate Percentage Revenue from AI: 22%
nVent Electric plc (NYSE:NVT) designs, manufactures, markets, installs, and services electrical connection and protection solutions. The firm is emerging as an important player in the AI space as it offers cooling solutions for data centers. Since AI firms rely on fast data processing, the chips they use to process the data often get hot. Traditional air cooling methods are not always the best solution for firms who are increasingly looking towards building smaller but more capable data centers. The liquid cooling solutions offered by the company save energy, enable firms to put more machines in a smaller space, and have better overall value since they come without hefty maintenance charges typical of air cooling systems.
Beth Wozniak, the CEO of nVent Electric plc (NYSE:NVT), noted during the first quarter earnings call that the company was witnessing an acceleration in demand for data solution products, a change she attributed to the AI trend sweeping the markets across the globe. Wozniak highlighted the liquid cooling solutions offered by the firm in particular during the call, describing the growth trends due to AI as strong.
In its Q1 2024 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and nVent Electric plc (NYSE:NVT) was one of them. Here is what the fund said:
“Our top contributors were NVent Electric plc (NYSE:NVT), Corebridge Financial and Lamar Advertising. nVent Electric provides electrical connections and protection solutions. These are mission-critical elements in commercial electrical and mechanical systems and civil infrastructure. nVent has shown consistent and steady growth since the pandemic, having reported 12 consecutive quarters of year-over-year sales growth supported by the secular tailwinds of electrification, sustainability and digitalization. Growth has come from a combination of volumes and pricing, with the company successfully offsetting inflation with pricing. Due to the low cost of its products relative to a project and high failure costs for customers, nVent has good pricing power and sustainable margins. In the recent quarter, the company’s data centers business (~14% of sales) was a standout, growing 20% year over year, as the acceleration in artificial intelligence infrastructure investments has created increased demand for the company’s liquid cooling solutions. Though nVent is no longer selling as cheaply as when it first drew our interest, the stock still sells at a lower P/E multiple than the S&P 500® Index despite better earnings growth.”
Overall NVT ranks 8th on our list of the best industrial stocks that are already riding the AI wave. You can visit 20 Industrial Stocks Already Riding the AI Wave to see the other industrial stocks that are on hedge funds’ radar. While we acknowledge the potential of NVT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.