Vertiv Holdings Co

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Vertiv is a global leader in the design, manufacturing and servicing of critical digital infrastructure technology that powers data centers, communication networks, and commercial and industrial environments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Vertiv operates in a highly complex and competitive industry, with a diverse customer base and a global presence. This requires a detailed analysis of its business model, financials, and competitive advantages to determine the strength and sustainability of its moat.

Business Overview

Vertiv is a global leader specializing in designing, manufacturing, and servicing digital infrastructure technology, including power, cooling, and IT management systems. They serve a diverse client base spanning data centers, communication networks, and commercial and industrial environments.

Vertiv was previously known as Vertiv Acquisition Holdings Co. and became a publicly listed company on the NYSE on February 7, 2020, under the ticker symbol “VRT”.

Revenue Distribution

  • Americas: This segment represents the largest portion of Vertiv’s revenue, which includes the United States, Canada, and Latin America.
  • Asia Pacific: Includes China, Japan, India, and the rest of Asia.
  • Europe, Middle East, and Africa (EMEA): Encompasses Europe, the Middle East, and Africa.
  • Growth in Data Centers: Increased demand for data centers across many industries, which makes it very competitive. The increased use of cloud and edge computing is driving investments in new data centers, and driving the need to upgrade old ones.
  • Focus on Sustainability: Growing interest in energy-efficient solutions due to regulatory pushes and rising cost of energy.
  • Technological Innovations: The industry is constantly evolving through new hardware, software, and AI. This requires continued investments in research and development.

Competitive Landscape

The industry is quite competitive, with no one competitor dominating the market. Instead, many firms compete for market share.

  • Large Global Competitors: Major companies such as Schneider Electric, Eaton, and ABB compete in many of the same areas.
  • Niche Players: Many smaller players exist and target specific segments or markets.

What Makes Vertiv Different?

Vertiv has a global presence and a broad range of product offerings that spans across power, cooling, and IT management systems. It is a critical part of the supply chain in the industries it serves, meaning customers rely on it, especially for its products that cannot easily be changed out or replaced for another brand.

  • End-to-End Solutions: Vertiv’s portfolio includes a comprehensive range of products and services, spanning from power and thermal management to infrastructure monitoring and management, which allows it to provide integrated solutions to its customers.
  • Global Presence: The company’s global manufacturing base and sales network enables it to serve customers across many locations, with significant manufacturing capacity in key locations globally. This can provide it a competitive advantage when new business or expansions emerge in areas where its competitors lack a significant presence.
  • Customer Relationships: Vertiv has cultivated strong relationships with key players in the industries it services and often times integrates itself directly into the customer’s supply chain and has long-lasting customer relationships.

Financial Analysis

Income Statement

Vertiv’s income statement shows a pattern of steady revenue growth, although the impact of foreign currency fluctuations and acquisitions is evident.

  • Revenue: For the year ending 2023, Vertiv’s sales hit $6.9 billion, marking a 18.4% increase from the year before with growth across all geographic segments. This is primarily attributed to volume growth and price increases.
  • Gross Profit: The full year ended 2023 showed gross profits increased to $2.3 billion, while the gross profit margin for the year came to 33.7%.
  • Operating Income: Adjusted operating profit also saw a positive surge from $215 million in 2022 to $643 million in 2023. The adjusted operating margin also saw a very substantial increase to 9.3% in 2023.
  • These increases highlight the positive impacts of the operational improvements, increased pricing power, and the benefits reaped from the restructuring efforts taken to reduce costs.
  • Net Income: Vertiv reported net income of $400 million in the latest quarter, versus the previous loss of $152 million. The growth was primarily driven by increased operating profits, and a positive swing to profitability in 2023 from a net loss of $160.7 million in 2022.

Balance Sheet Health

  • Liquidity: Vertiv shows good liquidity, since it has $872 million in cash and cash equivalents.
  • Debt: The company carries a significant amount of long-term debt with debt obligations of around $4.8 billion (at the end of fiscal year 2023), although there are low debt maturities in the near-term. The debt carries significant interest payments at a variable interest rate, which could significantly impact profitability and cash flows going forward.
  • Equity: The company has around $2 billion in total shareholders’ equity.

Given the current level of indebtedness, the balance sheet health rating is only a 3 out of 5, and we will be monitoring this going forward.

Earnings Calls & Recent Concerns

  • Strong Demand: The management has mentioned several times that it is seeing strong demand for all its offerings across all its markets. Also it sees a potential expansion in the data center market in 2024.
  • Order Backlog: Vertiv also has a very robust backlog of orders (above 5 billion dollars), as well as the orders and contract awards are at a high level. Management believes there should be continued demand throughout 2024.
  • Improved Profitability: Recent restructuring efforts, cost reductions, increased volumes, and increased pricing power have led to better profitability, with increased margins and free cash flow. These will be targeted going forward as well.
  • Macroeconomic Uncertainty: The management has mentioned that macroeconomic uncertainty and foreign exchange fluctuations present risks to the business. Volatility in the global markets will make the financial future hard to predict.
  • Supply Chain Issues: While improved, supply chains are still a challenge that management is keeping an eye on, and it could impact profitability. Also related to this are longer lead times that still affect its output.
  • Capital Expenditure: Vertiv continues to invest large amounts of its capital into expanding its global operations, leading to substantial capital expenditures.
  • Stock dilution: Vertiv has issued additional stock for acquisitions and to pay off debt, this will lead to diluation in its stock’s value. Furthermore, warrants that the company has can cause diluation as well.

While sales are good, increasing operating expenses and dilution from warrants and stock options are notable risks that can significantly reduce share value if not handled correctly by management. It’s also good to note that the company was downgraded by Moody’s in 2023.

Moat Assessment:

  • Intangible Assets: Vertiv’s brand name in the power and data centers market provides a degree of loyalty and recognition with customers. Additionally, patent protection on its innovative technology provides it a competitive advantage.
  • Switching Costs: Due to tight integration with its customer supply chains and its highly customized solutions, the switching costs for customers can be very high, leading to customer lock-in and repeatable revenue streams.
  • Network Effects: The network effect seems somewhat less relevant to Vertiv.

  • Cost Advantages: While not as strong, Vertiv has some economies of scale in its production and distribution network that can reduce costs, while its geographical reach can be seen as a moat in and of itself.

  • Moat Rating: Overall, Vertiv’s moat is a 3 out of 5. While the company has strong brand recognition and high switching costs with its customers that protect it from competition, it still faces several risks that can erode its competitive advantages.

Understandability

  • Vertiv’s operations are quite easy to understand-it manufactures and sells products primarily in the power, data, and IT infrastructure sector. It provides end-to-end services to a lot of different industries and this makes it a lot easier to grasp.
  • However, it has a diverse business and customer base, along with complex financials, and this leads to some ambiguity in how to interpret results.
  • Understandability: Overall, it is at a 3 out of 5, it is a bit difficult to analyze due to its complex financials, but the business is easy to comprehend.