Vertiv Looked “Overvalued.” Then Orders Doubled.

On Oct. 28, Vertiv (NYSE:VRT) told investors that its orders had more than doubled from a year earlier. The stock opened more than 10% higher. Less than a week before, the same shares had sat nearly 50% below their peak.

Vertiv makes the unglamorous gear that artificial intelligence (AI) data centers can't run without. Its power systems feed electricity into server racks, and its cooling systems carry the heat back out. Vertiv joined The Motley Fool's real-money Data Center Superstars portfolio via Team Rule Breakers on Jan. 13 at $172.60.

The sixth of the six Rule Breakers Traits is: "Overvalued."

Most investors learn early to steer clear of stocks that look pricey. The Rule Breakers view holds that the market prices a stock for roughly the next six months, while much of what drives a business over a decade, such as leadership and a habit of innovating, never appears in the financial statements. Great companies tend to trade at a premium for that reason, and owning one usually means sitting through some brutal drops.

The Market Spent the Summer Siding With the Skeptics

In the spring, Vertiv traded at more than 80 times its trailing earnings, roughly double its five-year median. On July 29, second-quarter sales came in below expectations after a few large projects slipped into later quarters, and the stock fell about 17% that day. In October, rising borrowing costs revived worries about how the AI build-out gets paid for, and the shares fell for 11 straight sessions, Vertiv's longest losing streak since it began trading in 2020.

The investing team read the summer miss as revenue arriving late, with demand intact.

What Doubled Orders Say About Next Year

Data center operators typically order power and cooling equipment months before it's installed, so orders offer a rough preview of future sales. Vertiv's organic orders, which strip out acquisitions, more than doubled. Third-quarter sales rose 61%, management lifted its full-year sales outlook by about $650 million at the midpoint, and Vertiv ended the quarter with more cash than debt.

At around $236, the stock trades at about 33 times the midpoint of management's 2026 adjusted earnings guidance. After its first-quarter report in the spring, investors were paying more than 50 times expected earnings.

The Risk in a Short Customer List

Vertiv sells to a short list of enormous buyers. Hyperscalers such as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) decide how fast to build, and some of that building runs on debt that now costs more. If a few of them slow down together, Vertiv's orders could shrink as quickly as they grew. Acquisitions also supplied about 6 percentage points of this quarter's sales growth. Alphabet and Microsoft both report later on Oct. 28, and their spending plans bear directly on Vertiv's next few quarters.

What You'd Have to Believe

Owning Vertiv here means believing the build-out has years left to run and that Vertiv's grip on power and cooling for the densest AI racks will tighten as those racks run hotter. It also means accepting that the stock could fall by a third or more again before that plays out. An investor who expects hyperscaler spending to peak within a year or two will find 33 times earnings steep. The doubled orders suggest customers are already planning well past the six months the market tends to price.

The Motley Fool has positions in and recommends Alphabet, Microsoft, and Vertiv. The Motley Fool has a disclosure policy.