When books are written about mid-2020s technology and business trends, it’s a safe bet that many will present artificial intelligence (AI) as a prime example. AI is not only a buzzy topic of conversation and a useful tool for a growing number of people, but it also remains the in-demand technology for every future-forward company, no matter its business.
But powerful technology doesn’t come cheap, and mountains of capital are being spent to build and expand data centers to support substantial AI compute. In the spirit of good, traditional pick-and-shovel investing, here are two industrial companies deeply involved in this activity and profiting from it — Caterpillar(NYSE: CAT) and Vertiv Holdings(NYSE: VRT).
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1. Caterpillar
Although Caterpillar is a storied, well-known company, many people familiar with it wouldn’t immediately connect it to AI data centers. Instead, they’re much more likely to identify it with its foundational business, the manufacture of heavy industrial vehicles. But the classic industrial profile firmly associated with the company obscures its important role in next-generation data centers. The second-largest (by sales) of Caterpillar’s four divisions, power and energy, supplies the heavy equipment that keeps those facilities running 24/7.
It manufactures and sells reciprocating (i.e., piston) engines and accompanying generator sets (“gensets” in industry parlance). These powerful machines have traditionally been used for backup power. However, given the sky-high demand for AI build-outs, many data center operators can’t or won’t wait for their facilities to connect to the standard power grid. For them, a “package” of a Caterpillar engine and genset is an elegant, nearly out-of-the-box primary generating solution.
Management doesn’t break down divisional sales by client or product type, so we can’t precisely pin down the dynamics of these goods.
However, the power and energy division saw its revenue zoom 21% higher year over year in Caterpillar’s most recently reported quarter (to $7 billion); that, combined with the construction industries unit’s 38% boost, contributed to overall company revenue growth of 22% to $17.4 billion.
There’s plenty more power where that came from, it seems. Concurrent with the release of its first-quarter results at the end of April, Caterpillar dramatically raised its forecast for sales of power generation products. It now feels that in 2030, these will triple from 2024’s level; formerly, it was guiding “merely” for double that figure.
Even if it doesn’t hit that mark, it’s sure to post impressive growth in the likely case that it remains a go-to supplier of that crucial infrastructure. That’ll maintain its status as a crucial — if under-the-radar — participant in the AI revolution.
2. Vertiv
Lesser known to the general public than Caterpillar, Vertiv is a highly specialized manufacturer of crucial hardware for operating AI-ready data centers. The company is experiencing particularly high demand for its liquid-cooling and critical-power solutions. It’s also doing brisk business in other mission-critical goods, such as switchgear and busways.
One of Vertiv’s great strengths is its ability to service both retrofits (i.e., legacy data centers being updated to handle AI compute) and greenfield projects. With plenty of jobs in both categories, Vertiv has a relatively large and lucrative addressable market.
The company is taking enormous advantage of this. In its first quarter, it posted net sales of $2.65 billion, up 30% year over year.
For a growth stock to have true potential, of course, it needs more than just the top line to improve. Mission accomplished with Vertiv: Free cash flow not under generally accepted accounting principles (GAAP), for example, zoomed 147% higher to a meaty $653 million, and headline net income more than doubled to $390 million.
Meanwhile, its estimates for the future just keep rising. In what’s becoming a habit, the company again lifted its quarterly and full-year guidance when presenting those first-quarter numbers. It’s now guiding for top-line growth approaching 30% over 2025; in dollar terms, that’s $13.5 billion to $14 billion. Non-GAAP (adjusted) earnings should be $6.30 to $6.40 per share.
Personally, I doubt these are the last guidance raises for Vertiv, given the excellent position it has carved out in its various niches. I’d say the same for those double- (and even triple-) digit increases in major fundamentals. Yes, it’s an expensive stock on its valuations, but it clearly has much room to grow, which to my mind makes it a near-unquestionable buy candidate.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Caterpillar and Vertiv. The Motley Fool has a disclosure policy.
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