Despite inflation and supply chain challenges, this IT company has a bright future

Vertiv Holdings (NYSE:VRT) went public in February 2020 after a spin-off from Emerson Electric (NYSE:EMR) and the subsequent merger with GS Acquisition Holdings Corp II (NYSE:GSAH.U). Vertiv is a data and IT company primarily serving businesses in three end markets: data centers, communications networks, and commercial and industrial environments.

Despite challenges from rising inflation and a lagging global supply chain, the stock is up 43% year-to-date, which is handily the best S&P 500 and his 25% profit so far. Can the market-conquering gains continue? Let’s dive in.

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What Vertiv Does?

Vertiv’s offerings include power and thermal management products, integrated rack systems, modular solutions and management systems for monitoring and controlling digital infrastructure. In addition, Vertiv offers lifecycle management services, predictive analytics, and professional services for deploying and optimizing these products and associated systems.

Vertiv’s end markets are experiencing unprecedented growth due to the sheer volume of data. As the world becomes a more digitally connected place, the need for services delivered by Vertiv will continue to grow.

Financial performance

For the nine months ended September 2021, Vertiv generated $3.6 billion in revenue, representing a 17% year-over-year increase. While the company’s gross margin on services remained flat, gross product margins declined from 31% to 29% year-to-date. For this reason, Vertiv’s gross margin blended year-over-year declined. According to Vertiv, the main reasons for the gross margin deterioration are related to inflation and supply chain headwinds. The company’s material and freight costs have suffered inflation in the form of higher raw material prices, freight rates, as well as premiums paid for spot buys and expedited shipments due to limited parts availability.

Vertiv is currently fighting inflation and supply chain shortages in the US and worldwide. Despite these challenges, Vertiv is still growing its revenue while experiencing margin swings only on the product side of its business.

The COVID-19 pandemic and its consequences have certainly put the company’s business model to the test. However, at the end of 2020, Vertiv’s 2021 sales forecast was $4.75 billion to $4.8 billion. As of the third quarter of 2021, the company’s revised forecast is $4.97 billion to $5.03 billion. While these revised numbers include $55 million in estimated revenue effects from the E+I Engineering acquisition, if we reverse the contribution of inorganic growth, the company’s current revenue forecast is well above its initial forecast of $4.8 billion for 2021. Vertiv’s leadership has proven that it can navigate uncertain times and still deliver for customers and shareholders.

What now?

Vertiv has a relatively short history as a publicly traded company. The Complexity of the SPAC Merger with GS Acquisition Holdings II Corp. and the associated costs, as well as having to operate for most of its life as a publicly traded company during a global pandemic and economic crisis, make year-on-year comparisons difficult to gauge.

It is important to keep in mind that Vertiv has a large and growing total addressable market. Despite economic pressures from the COVID-19 pandemic, inflation and supply chain issues, the company’s total addressable market is more than $37 billion and is expected to grow at a compound annual growth rate (CAGR) of 4% to 5% until 2025.

A big reason I’m so excited about Vertiv is that almost all end markets experience some degree of growth, and every market has a welcome lack of volatility. Therefore, while Vertiv’s growth profile may seem a little muted compared to flashy growth stocks, Vertiv’s business is very predictable, which gives me some comfort as an investor. In addition, some of their end-markets (such as cloud and hyperscale data centers) are well-prepared for their own growth, as increased digitization, multi-device adoption and Internet of Things (IoT) are the main drivers of data growth. All of these factors make Vertiv a solid player in a crowded field of technology stocks.