In this issue of Moneyball Investing Iβll be coveringΒ Vertiv Holdings (VRT).Β Vertiv designs, manufactures, and services critical digital infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments in the Americas, Asia Pacific, Europe, the Middle East, and Africa. Letβs dig into who Vertiv is, what it does, and what the future may hold.
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Vertiv Overview
My guess is that you havenβt heard of Vertiv. For the last couple of years the capital markets have experienced hyperbolic melt-ups courtesy of high-growth software companies, cryptocurrencies, and meme-stocks. In this newsletter I am going to outline a company that may not be the most high-profile name, but has generated very attractive returns for its investors. This is because Vertiv supplies mission critical services to its customers worldwide. Although it may not be a ground-breaking piece of software or new world-changing widget, Vertivβs business is monumentally important in an ever-increasing digitally connected world.
The Business:
Vertiv Holdings went public in February 2020 following a merger with GS Acquisition Holdings Corp. The company designs, manufactures and services critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data. Vertiv provides this technology to data centers, communication networks and commercial & industrial environments in many countries around the globe.
The company provides the hardware, software and services to facilitate an increasingly interconnected marketplace of digital systems where large amounts of indispensable data need to be transmitted, analyzed, processed and stored. Whether this growing quantity of data is managed centrally in hyperscale/cloud locations, distributed at the βedgeβ of the network, processed in an enterprise location or managed via a hybrid platform, the underpinnings and operations of all those locations rely on critical digital infrastructure and services.
Vertivβs offerings include power management products, thermal management products, integrated rack systems, modular solutions, and management systems for monitoring and controlling digital infrastructure. These comprehensive offerings are integral to the technologies used for a number of services, including e-commerce, online banking, file sharing, video on-demand, energy storage, wireless communications, Internet of Things (βIoTβ) and online gaming. Moreover, through its global services network, Vertiv provides lifecycle management services, predictive analytics and professional services for deploying, maintaining and optimizing these products and their related systems.
Customers:
Vertiv primarily serves businesses across three end markets: data centers (including hyperscale/cloud, colocation, enterprise and edge), communication networks, and commercial and industrial environments.
Data Centers: The primary purpose of a data center is to process, store and distribute data. Types of datacenters include:
Cloud/Hyperscale: These facilities are massive in scale and are primarily used to support off-premise cloud applications. This portion of the industry is growing rapidly. Examples of companies in this space include Microsoft Azure, Amazon Web Services, and Google Cloud.
Colocation: These facilities range in size and offer users a location where they can place their information technology equipment, while the building and critical digital infrastructure is owned by the colocation company. This portion of the industry is growing rapidly. Examples of companies in this space include Digital Realty and Equinix.
Enterprise: This classification refers to the βFortune 1000β type businesses that have their own on-premise data centers. Examples of companies in this space include Goldman Sachs, J.P. Morgan, Walmart and Cleveland Clinic. Growth of the enterprise market has generally been flat for the past three years.
Edge: These types of data centers are at the infancy stage of their development and will be utilized by all of the aforementioned categories in the future. These locations are decentralized by nature and located closer to where the data is being demanded (i.e., towards the edge of the network). This market is small today, but the opportunities for growth in this space are expected to increase as the proliferation of connected devices and data storage needs continue to grow in the future.
Communication Networks: This space is comprised of wireline, wireless and broadband companies. These companies create content and are ultimately responsible for distributing voice, video and data to businesses and consumers. They deliver this data through an intricate network of wireline and wireless mediums. Additionally, some of these companiesβ locations act as data centers where the data is delivered, processed and stored. This sector has a generally low single-digit growth profile.
Commercial/Industrial: This space is comprised of those applications that are tied to a companyβs critical systems. Examples include transportation, manufacturing, oil and gas, etc. These applications are growing in their need for intelligent infrastructure and may be regulated or need to pass some level of compliance. The growth in this area generally tracks Gross Domestic Product.
A big reason that I am so enthusiastic about Vertiv is that nearly all of their end markets are experiencing some level of growth. Although none of them are experiencing double digit hypergrowth, a company like Vertiv makes for a compelling investment due to the lack of exaggerated volatility its market faces. In other words, although the growth profile may seem a bit boring to some, its business is highly predictable which gives me some comfort as an investor. Moreover, some of their end markets such as Cloud/Hyperscale Datacenters are well-poised for growth as increased digitization, multiple device connection adoption, and IoT contribute as key drivers to the boom in data (remember, data is the new oil π’οΈ). Furthermore, Edge datacenters are in their infancy, providing a greenfield opportunity for Vertiv.
Products/Services:
Vertivβs principal offerings include:
Critical infrastructure & solutions: Includes AC and DC power management, thermal management, and integrated modular solutions
Integrated Rack Solutions: Delivery of racks, rack power, rack power distribution, rack thermal systems, configurable integrated solutions, and hardware for managing IT equipment.
Services & spares: Preventative maintenance, acceptance testing, engineering and consulting, performance assessments, remote monitoring, training, spare parts, and critical digital infrastructure software.
Financials and Key Performance Indicators π
Through Q3 2021, Vertiv has generated $3.6 billion in revenue which represents a 17% year over year increase. However, while the companyβs Gross Margin on Services has remained flat, Product Gross Margins have declined from 31% to 29% YTD. For this reason, Vertivβs blended Gross Margin has seen a year over year decline. The primary reasons for the deterioration in Gross Margin are related to inflation and supply chain headwinds. The companyβs material and freight costs have experienced inflation in the form of higher commodity prices, freight rates, as well as premiums paid for spot-buys and expedited shipments due to parts availability challenges.
Revenue Trends:
The charts above illustrate that Vertiv is growing its revenue base across all geographies. The Americas division is nominally up on a year over year basis driven by strong services growth which is being offset by supply challenges for manufactured products. However, backlog remains at record levels. As September 30, 2021 Vertivβs total backlog was $2.4 billion. In Asia-Pacific, Vertivβs organic sales were flat with COVID recovery in India offset by lower sales in China. Finally, in EMEA sales increased due to large colocation data center projects and strong execution on backlog.
Cash Flow Trends:
Vertivβs cash flow for the third quarter is lower compared to the same period in the prior year. This is mainly due to inventory buildups, increases in capex, as well as M&A transaction fees. Comparing 2020 and 2021 is difficult for a company like Vertiv because the company experienced a lot of Legal, Restructuring, and Advisory fees in 2020 that were non-recurring in nature. Moreover, capex was abnormally low in 2020 due to COVID and in 2021 the company is now facing inflation challenges and supply chain shortages, leading to an inventory build-up and short-term outflow of cash. All things considered, though, the company is growing its revenue and booking record backlog all while sustaining a healthy margin profile. Vertiv ended Q3 with $744 million of Cash on its balance sheet.
Valuation:
As of the time of this writing, Vertivβs market cap is $8.7 billion. This represents roughly a 1.8x Price / TTM Sales multiple. Given the large and growing addressable market with secular industry tailwinds, combined with the potential for value creation driven by organic and inorganic growth, and its experienced management team with a strong track record of execution, I view this an attractive entry point for Vertiv.
Risk Factors π¨
Economic and Political Risks: Vertiv operates in dozens of countries around the globe. Changes or ongoing instability in a countryβs or regionβs economic or political conditions, including inflation, recession, interest rate fluctuations can make it difficult for them to anticipate future business conditions, cause delays in the placement of orders, complicate dealings with governments regarding permits and other regulatory matters and make customers less willing to make cross-border investments.
Mitigant: Vertiv is currently combatting inflation and supply chain shortages in the United States and globally. Despite these challenges, Vertiv is still growing its top-line revenue while only experiencing margin fluctuations on the product side of its business due to inflation. Moreover, the COVID-19 Pandemic in 2020 certainly tested the companyβs business model. However, at the end of 2020 Vertivβs Sales guidance for 2021 was $4.75 billion to $4.8 billion. As of Q3 2021, the companyβs revised guidance is $4.97 billion to $5.03 billion. These revised numbers include $55 million in estimated revenue impacts from M&A. Even backing out the contribution of inorganic growth, the companyβs current revenue projection is well above its initial guidance. Vertivβs leadership has proven that it can navigate through uncertain times and still deliver for customers and shareholders.
Competition: Vertiv faces competition from a variety of different companies.
Mitigant: The majority of Vertivβs competitors are targeted within a specific offering or a specific geographic location. Across its three markets, Vertiv faces two principal types of competitors: niche players and global competitors. Vertivβs ability to differentiate itself because of its ability to service customers in each phase of the product lifecycle allows them to address the local and regional needs of businesses of various sizes. The table below illustrates Vertivβs sticky customer base and the high-caliber customers it has.
Short Operating History: Vertiv has a short history operating as a public company. Moreover, given the complexity of the merger and the costs associated with it, as well as the company combatting a global Pandemic and economic crises during the majority of its life as a public company make year over year comparisons difficult to gauge.
Mitigant: It is important to keep in mind that Vertiv has a large and growing total addressable market. Additionally, several of its end markets are experiencing unprecedented growth due to the boom in data. As the world becomes a more digitally connected place, the needs for services provided by Vertiv will continue to grow. For this reason, itβs paramount that we keep in mind that economic pressures brought on by COVID, inflation, and the supply chain can be viewed as short term hiccups in an otherwise growing industry. Moreover, despite the challenges it has faced, Vertiv has continued to perform well as evidenced by its ability to increase revenue on a global scale, generate record levels of backlog, and pursue M&A targets. I view Vertiv as a leader in this space, rather than one that could end up as an M&A target. I think this is a tribute to its stellar leadership, particularly Rob Johnson and David Cote.
Leadership π
Select MGMT Bios:
Additional Resources π
Investor Presentation (prior to merger): Slide deck
Q3 2021 Investor Presentation: Slide deck
Q3 2021 Press Release: Financial Results
Investor Relations: website
Interview with CEO: Link
Case Study: Link
π¨ Disclaimer:Β The stocks mentioned in this newsletter are not intended to be formal recommendations. Rather, this newsletter is for educational and entertainment purposes. I encourage readers to do their own research and conduct their own due diligence before buying any stocks mentioned in my write-ups.
Thank you for reading!Β πDonβt forget toΒ Subscribe and Share!Β Itβs Free! πΈ
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Moneyball Investing is a free newsletter breaking down compelling investment opportunities. Subscribe if you are interested in investing in innovative companies and the technologies and products behind them.
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