Can nVent Electric Become the Next Vertiv?

Vertiv (NYSE: VRT) has become the leader in liquid cooling solutions for artificial intelligence (AI) AI data centers, but a 700% run-up in the stock price during the past five years may have some investors feeling they missed the ride. For investors seeking a second chance at this opportunity, nVent Electric (NYSE: NVT) has a shot at becoming the next Vertiv.

Image source: Getty Images.

Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »

How they are similar

Vertiv and nVent Electric were both around long before AI demands necessitated liquid cooling solutions. While nVent Electric's brands date back to 1894, Vertiv has been around for 80 years.

Data center growth has been a main story for each company. nVent Chief Executive Officer Beth Wozniak cited "significant data center growth" in the company's Q2 earnings press release while announcing a manufacturing expansion for liquid cooling.

Less surprisingly, Vertiv CEO Giordano Albertazzi mentioned intensifying demand for AI compute, which has led to more advanced, infrastructure-intensive deployments of liquid cooling systems. As AI evolves and becomes more complex, Vertiv stands to make more money from manufacturing and installing its liquid-cooling solutions in data centers.

Vertiv and nVent Electric both raised full-year forecasts as AI demand continues to exceed expectations. They also have vast backlogs. nVent closed out the quarter with a $2.5 billion backlog, while Vertiv has a $15 billion backlog.

The differences

nVent is a smaller company. It has a $21 billion market cap against Vertiv's $80 billion. The former is also growing faster, with 53% year-over-year revenue growth compared to Vertiv's 24%. Both companies have similar net profit margins, but nVent's profits are growing faster.

Valuation metrics also favor nVent, which has a 19.5 forward P/E ratio compared to Vertiv's 21.8 forward P/E ratio. A lower valuation gives nVent a somewhat higher margin of safety than Vertiv at current levels, as long as both companies maintain their current growth rates.

One of the biggest distinctions between these investments is the extent to which they are involved in liquid cooling solutions for data centers. It's at the forefront of Vertiv's business, but nVent is more diversified.

More diversification isn't always a good thing. A higher percentage of Vertiv's business centers on the hottest industry, whereas that share is a smaller slice of nVent's total sales. That gives Vertiv greater exposure to AI, but it also means that as nVent's AI data center business becomes a larger share of total sales, its revenue growth rates can accelerate and remain faster than Vertiv's.

How to approach nVent

nVent is at the right place at the right time and stands to boost its revenue and profit margins thanks to the AI build-out. Right now, it's a smaller slice of nVent's total business than Vertiv, but that may create the opportunity for elevated future returns.

Since nVent has a smaller market share in the AI data center industry, it has more room to expand than a more mature company like Vertiv. Furthermore, as noted, nVent has a more attractive valuation.

nVent also saw its free cash flow soar 125% year over year, reaching $167 million. That means the company can keep and increase its cash even as capital expenditures continue to grow. While nVent benefits from rapid capital expenditure increases, it's also encouraging to see positive free cash flow as the company seeks to expand its manufacturing capabilities.

nVent looks very much like a smaller Vertiv. Although Vertiv has a much deeper backlog, nVent is delivering higher growth rates right now. As its AI industry presence expands, it can scale its pipeline over time.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vertiv. The Motley Fool has a disclosure policy.