Forget AI Stocks: This Industrial Winner Is Building AI's Backbone

The buildout of the artificial intelligence (AI) data centers is massive, as hyperscalers Microsoft, Meta Platforms, and Amazon have all committed to massive capital expenditures. Goldman Sachs reports hyperscalers are slated to spend $500 billion on infrastructure this year.

This massive spending creates an opportunity for companies that help facilitate the buildout. One company seeing unprecedented demand is Eaton (NYSE: ETN). The company has taken steps to pivot its portfolio toward critical infrastructure aligned with megatrends in the economy and is set to ride the AI data center boom higher.

Eaton is riding the data center buildout higher

Eaton provides electrical components to companies that power and ensure the smooth operations of their facilities or data centers. Its offerings include switchgears, transformers, power distribution units, uninterruptible power supplies, and energy storage solutions.

It has taken steps to build on its market position, and last year it announced its intention to acquire Boyd Thermal, giving it a strong foothold in the power and cooling systems business. This acquisition, which is expected to close in the second quarter, would give Eaton an established company in the liquid cooling industry, which is expected to grow substantially in the coming years.

According to Eaton management, the global liquid-cooling market is projected to grow at a 35% annual rate through 2028. That's because AI chips require more cooling than traditional methods; traditional server racks have historically consumed between 10 and 15 kilowatts, while modern AI racks consume 80 to 100 kilowatts.

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Eaton is seeing robust demand, with orders outpacing historical averages. This includes a surge in projects valued at over $1 billion (megaprojects); in the third quarter, megaproject announcements totaled $239 billion, with data centers accounting for nearly half of that total.

In the third quarter, Eaton's data center orders increased 70% year over year. Meanwhile, data center sales increased 40%, and the backlog for its Electrical America's segment has grown 20% year over year to $12 billion.

A pick-and-shovel stock that should benefit from massive hyperscaling spending

Eaton is seeing strong demand and currently trades at 26.4 times this year's projected earnings. The company is vulnerable if hyperscalers pull back on their large capital expenditures, which would negatively impact future earnings. However, there aren't any signs of a pullback in spending anytime soon.

The data center buildout will unfold over the next several years, which should be a tailwind for Eaton's business. For investors looking to get in on the AI data center buildout boom and seeking a pick-and-shovel play, Eaton is a solid stock to consider.

Courtney Carlsen has positions in Microsoft. The Motley Fool has positions in and recommends Amazon, Goldman Sachs Group, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.