Vertiv Holdings (VRT) Stock Looks a Little Expensive

Vertiv Holdings (VRT) stock has surged over the past 12 months, driven by positive trends in artificial intelligence (AI) and data centers. At $130 a share, the stock is up more than 150% in the last 12 months, as indicated by the chart below. I actually missed the chance to buy this stock at $69 in August when the upside outweighed the down. However, I’m now bearish on the stock as it trades at a high valuation. Despite strong growth expectations, I believe the current valuation offers no room for error.

Vertiv’s Meteoric Rise

While I’m bearish on the VRT stock, I think Vertiv is an excellent company and its meteoric rise is a testament to its strong market position, market tailwinds, and growth potential. Vertiv’s stock has skyrocketed, outperforming the market in the process. This surge is largely attributed to Vertiv’s innovations and services in AI and data center technologies, particularly in digital infrastructure and continuity solutions. And this has translated into impressive earnings growth.

The company’s earnings per share (EPS) is expected to grow from $2.69 in 2024 to $8.28 by 2030 — albeit only one analyst is providing a forecast through that far out into the future — representing a compound annual growth rate (CAGR) of over 20%. This growth is supported by Vertiv’s renewed focus on the booming data center market, which is projected to reach $438 billion by 2028.

Positively for investors, management has revised its organic revenue growth forecast to a 12%-14% CAGR from 2024 to 2029, up from a previous range of 8%-11%. Additionally, Vertiv is now targeting an adjusted operating margin over 25% by 2029, an upgrade from the previous goal of more than 20% by 2028. Despite these positive indicators, the stock’s market-topping surge has pushed its forward price-to-earnings (P/E) ratio sky-high and significantly above the S&P 500 average.

Vertiv’s Valuation is Stretched

This brings me to the core reason for my bearishness on VRT stock. Execution risk is simply too great considering the valuation. Vertiv’s current market valuation appears stretched across multiple metrics when compared to both sector medians and the company’s own historical averages. The non-GAAP forward P/E of 47.2 times is 120% above the sector median of 21.5 times, while the GAAP forward P/E of 77 times is 212% higher than the sector median of 24.7 times.

Moreover, the stock’s EV-to-sales (TTM) ratio of 6.62 times is 220% higher than the sector median of 2.1times. Likewise, the stock is trading 98% higher than its five-year average forward P/E and 175% higher than its five-year average EV-to-sales ratio. Nonetheless, I appreciate that the growth-adjusted metrics paint a different picture. The price-to-earnings-to-growth (PEG) ratio of 1.3 times is 35% lower that the sector median of two.

This PEG ratios suggest that Vertiv’s high valuation might be justified by its strong growth prospects. However, this also means that the company must meet or exceed these growth expectations to maintain its current valuation. So, while Vertiv’s growth potential is reflected in its favorable PEG ratio, the overall valuation indicates a premium pricing that leaves little or no room for error. This creates a significant execution risk, as any missteps in achieving projected growth could lead to a substantial correction in the stock price.

Revenue Growth is Modest

Another reason I’m bearish is that Vertiv’s revenue growth has been relatively modest compared to its surging market valuation. The company’s second-quarter sales grew by 14% to $1.95 billion, which is strong but not exceptional given the current AI-driven data center boom and the fact that the stock is up 200% over 12 months. Moreover, Vertiv only increased its full-year revenue guidance by $50 million, a small adjustment considering the stock’s surge.

This modest revenue growth can be attributed to elongated order timelines. Many of Vertiv’s new orders are for future years, with management noting positive trends in pipeline, orders, and backlog extending into 2025. The lengthening of the order book timeline is a key factor, though Vertiv hasn’t provided specific metrics to quantify this trend. This elongation suggests that while demand is strong, revenue recognition will be spread over a longer period, potentially limiting near-term growth rates.

Looking at the data, analysts project Vertiv’s revenue to grow from $7.8 billion in 2024 to $15.4 billion by 2030, representing a CAGR of about 12%. While substantial, this growth rate may not fully justify the stock’s current valuation. Moreover, the slow-moving revenue also presents a potential barrier to earnings growth, as costs may increase more rapidly than recognized revenue in the short-term

Is Vertiv Holdings Stock a Buy?

On TipRanks, VRT comes in as a Strong Buy based on seven Buys, one Hold, and zero Sell ratings assigned by analysts in the past three months. The average VRT stock price target is $100.86, implying about 20.4% downside risk potential. 

Read more analyst ratings on VRT stock

The Bottom Line on VRT Stock

I’m bearish on Vertiv Holdings as its valuation appears stretched relative to its the opportunity at this time. The company’s stock has surged over 200% this year, yet revenue guidance increased by only $50 million, reflecting elongated order timelines. Currently the only metric where Vertiv demonstrates a discount to the sector median is its forward PEG, indicating the high expectation for growth. As a result, any missteps in execution could lead to a significant stock price correction. For these reasons, I would avoid VRT stock right now.