This Industrial Stock Could Be a Hidden Gem (and Here's Why)

The surge in artificial intelligence (AI) has ignited an infrastructure supercycle, with a favorable outlook for companies that provide power, cooling, and specialized data center solutions.

One company that could be a hidden gem for this growth is Eaton (NYSE: ETN). The industrial company is a power management and cooling behemoth poised to benefit from the tailwinds of the AI data center supercycle.

Eaton's "chip-to-grid" strategy to meet rising demands from AI data centers

Artificial intelligence is changing the physical and architectural infrastructure needed for modern data centers. Traditional cloud computing racks consume 10 to 15 kilowatts and use standard air cooling. However, next-generation AI processors consume 80 to 100 kilowatts per rack, necessitating a transition to liquid cooling. Eaton is a legacy electrical component supplier transforming into an integrated infrastructure partner for AI hyperscalers.

Eaton is pursuing a "chip-to-grid" strategy to build an end-to-end framework to manage power and thermal demands in AI data centers. The company spent $9.5 billion to acquire Boyd Thermal, a global leader in liquid cooling, with engineering teams that work closely with custom silicone developers generations ahead of commercial release. Eaton management believes the global liquid-cooling market could grow by 35% annually through 2028.

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In the fourth quarter, data center orders in Eaton's Electrical America segment surged 200% year over year. Its total backlog reached $19.6 billion, of which Electrical America accounted for $13.2 billion, and grew 31% year over year. The segment also hit a book-to-bill ratio of 1.2, indicating that billings are outpacing revenues and signaling strong demand for its services.

Mega-projects could propel Eaton higher

One of the biggest risks is if the data center buildout doesn't happen as quickly or on as large a scale as expected. This could be the case if hyperscalers don't see a return on their massive capital expenditures. Additionally, in the near term, Eaton expects to see margins come under pressure as it spends $1.5 billion to expand capacity and projects a 130-basis-point headwind in 2026 due to plants coming online.

That said, Eaton notes a wave of large-scale capital investments, which it calls "mega projects." These projects take three to five years to convert into revenue and could be a durable long-term tailwind for the business.

According to the company, there are over 866 announced mega-projects totaling $3 trillion, with the figure growing 30% year over year. The company notes that it has a win rate of about 40% on mega-project bids. For investors seeking a pick-and-shovel stock to play the rapid expansion of AI data centers in the coming years, Eaton looks like a solid choice.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.