We recently published a list titled 10 Best AI Stocks With More Upside on $1.2 Trillion AI “Value Creation Opportunity”. Since Vertiv Holdings Co (NYSE:VRT) ranks 9th in the list, it deserves a deeper look.
UBS Global Wealth Management’s (GWM) recently published a detailed report discussing different layers of the AI “value chain,” estimating the combined market value opportunity from the layers at $1.2 trillion by 2027.
UBS segments the AI market into three layers – Enabling Layer, Intelligence Layer and Application Layer. The enabling layer is what actually powers the AI ecosystem — infrastructure, GPUs, data centers, Cloud, servers. UBS further divided this layer into two segments, Infrastructure and Cloud. The firm expects a combined $516 billion revenue opportunity from the enabling layer by 2027.
Next up is the intelligence layer, which acts as the brain of the entire AI ecosystem. Large language models and backed software systems sit at this layer. UBS estimates that this layer presents a $225 billion opportunity by 2027.
The third layer in the AI market highlighted by UBS is the application layer. This is where the end user comes in. Cloud, data centers, GPUs, LLMs and algorithms amount to nothing if the end user cannot benefit from their huge processing power. UBS said estimating monetization opportunity of this layer was the hardest since it’s still in its very early stage. The application layer addresses actual AI software used by customers — think AI assistants, GitHub CoPilot, marketing, customer service software, etc. UBS expects a whopping $395 billion in revenue opportunities for the application layer by 2027.
Key AI Predictions
The UBS report also made key “predictions” about the AI landscape. The firm’s analysts believe the race to achieve artificial general intelligence (AGI) could give rise to a “capex cycle” that could “inflate” the AI investment bubble. UBS sees the dominance of a few companies in the AI industry will continue to be a reality moving forward, as it expects “monolithic players” and “AI foundries” prevailing in the near future.
Based on this report, let’s take a look at the top companies that will directly benefit from this $1.16 trillion opportunity by 2027. For this article we analyzed UBS analysis and picked 10 stocks that are directly exposed to the three layers in the AI ecosystem highlighted by UBS in its latest report. These companies are positioned extremely well to benefit from the monetization opportunities in the enabling, intelligence and application layers of the AI market. With each stock we have mentioned the number of hedge fund investors. 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 financial advisor talking to a client in the middle of a trading floor.
Vertiv Holdings Co (NYSE:VRT)
Number of Hedge Fund Investors: 85
UBS said in its latest report that the Infrastructure part of the AI Enabling layer is exposed to a $331 billion value creation opportunity by 2027. Data centers account for a major part of this layer, according to the investment firm. Vertiv Holdings Co (NYSE:VRT) is one of the best AI data center stocks to buy now based on hedge fund sentiment and growth catalysts.
Vertiv Holdings Co (NYSE:VRT) shares are already up 100% so far this year. The stock jumped in April after Vertiv Holdings Co (NYSE:VRT) increased its guidance, citing AI-related data center growth. For the full-year 2024, Vertiv Holdings Co (NYSE:VRT) expects its revenue to come in the range of $7.54 billion and $7.69 billion, compared to the previous estimate of $7.52 billion to $7.66 billion.
Vertiv Holdings Co (NYSE:VRT) is a market leader in the data center power and cooling market, which has nowhere to go but up from here since companies are hungry for data center solutions as they begin to deploy AI software. During the first quarter the company saw a 60% increase in organic orders. For full-year, the company plans to increase its CapEx to $200 million, which is high, but still in the company’s CapEX margin range between 2.5% to 3%. Vertiv also upped its revenue guidance. Here’s what the management said during the latest earnings call:
“We are expecting organic sales growth of approximately 12% with Americas up mid-teens, APAC high single digits and EMEA low double digits. We anticipate an $18 million year-over-year foreign exchange headwind in the second quarter as the U.S. dollar has strengthened against most foreign currencies over the last several months. We expect second quarter adjusted operating profit between $315 million and $335 million and adjusted operating margin of 16.9%, up 240 basis points at the midpoint with expected benefits from price/cost partially offset by continued growth investments.
Based upon a favorable start to the year and visibility into a strong sales pipeline for the rest of the year, we are increasing estimates for organic sales growth from 10% at the midpoint to approximately 12% with higher expectations across all 3 regions. In addition, we are increasing the midpoint of adjusted operating profit guidance from $1.3 billion in our prior guidance to $1.35 billion primarily driven by contribution margin on incremental sales. And as a result, we are increasing midpoint guidance for adjusted operating margin to 17.7% with the primary driver there being fixed cost leverage.”
Vertiv Holdings Co (NYSE:VRT) earnings are expected to grow 35% this year, while the Wall Street expects a 28% growth next year. Based on these growth estimates, Vertiv’s forward P/E ratio of 37.45 looks attractive.
Alger Mid Cap Growth Fund stated the following regarding Vertiv Holdings Co (NYSE:VRT) in its first quarter 2024 investor letter:
“Vertiv Holdings Co (NYSE:VRT) specializes in critical cooling and power management infrastructure technologies, catering primarily to data center clients. As an industry leader in data center power and cooling solutions, we believe Vertiv stands to benefit from the secular growth in data and computing needs. During the quarter, shares contributed to performance driven by strong operating results and-increasing investor expectations for Al implementation driving more data center demand. Given its leading position, we anticipate Vertiv will demonstrate accelerated revenue and earnings growth as the demand for computing, particularly for Al applications. continues to rise.”
Overall, Vertiv Holdings Co (NYSE:VRT) ranks 9th on Insider Monkey’s list titled 10 Best AI Stocks With More Upside on $1.2 Trillion AI “Value Creation Opportunity”. While we acknowledge the potential of Vertiv Holdings Co (NYSE:VRT), 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 Vertiv Holdings Co (NYSE:VRT) 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.