- Wednesday, October 16, 2024
Artificial intelligence has revolutionized the tech industry, propelling companies like Nvidia to new heights in microchip sales. However, the impact of AI extends far beyond just one company, creating a massive wave of growth in data centers that shows no signs of slowing down.
The Backbone of Data
According to Schneider Electric CEO Peter Herweck, data centers serve as the production hubs for an endless stream of data. The chips fueling AI models and algorithms demand four times more power and infrastructure compared to traditional server farms, highlighting the immense scale of operations required.
Unprecedented Growth
Nvidia's data-center business soared to $14.5 billion in third-quarter sales, marking a staggering 279% year-over-year increase. Similarly, Schneider, a key player in the electric hardware and software sector catering to data centers, experienced substantial growth. With sales totaling nearly $39 billion in 2023, the company has maintained an impressive 8% annual growth rate over the past three years.
Driving Innovation
Herweck emphasizes that the U.S. data center market is a primary driver for Schneider's success, constituting 21% of the company's business in 2023. He foresees this percentage growing further, projecting double-digit growth in the company's data-center sector for years to come.
Pioneering Design and Efficiency
Schneider has pioneered an industrialized approach to data-center design and production, focusing on enhanced quality, reduced costs, increased repeatability, and minimized errors. This strategy has not only solidified their position in the market but also set new standards for efficiency and innovation.
Beyond Borders
While Schneider leads the charge in data-center solutions, competitors like Eaton, Vertiv Holdings, and nVent Electric also benefit from the industry boom. These companies provide essential hardware and software crucial for the design and operation of modern data centers, further driving growth and innovation in the sector.
Data-Center Boom Boosting Schneider Shares and Others
Positive Performance
Schneider, along with the other three stocks, is reaping the benefits of the ongoing data-center boom. As of Wednesday's trading, Schneider’s U.S.-listed American depositary receipts saw a 34% increase over the past 12 months. Eaton, Vertiv, and nVent followed suit with gains of 62%, 306%, and 38%, respectively. In comparison, the S&P 500 and Nasdaq Composite rose by about 24% and 36%.
Vertiv's Strong Momentum
Vertiv stands out with the highest gains, with shares initially trading at approximately 26 times next year’s earnings by the end of 2022. Now, these shares are valued at around 28 times estimates, showcasing rapid earnings growth contributing to this increase.
Consistent Growth
The trend continues for the remaining three companies. While experiencing a slight multiple expansion, Eaton trades at approximately 27 times estimated 2024 earnings per share, as opposed to about 21 times by the end of 2022. nVent trades at around 19 times estimated 2024 earnings per share, compared to about 16 times previously. Similarly, Schneider now trades at 24 times estimated 2024 earnings per share, up from 18 times.
Future Outlook
With Nvidia consistently delivering strong performances, the higher valuation multiples are expected to remain stable. As Nvidia prepares to release their third-quarter earnings, Wall Street forecasts their data-center business to reach $17 billion in sales from $3.6 billion a year prior. Nvidia stock currently trades at around 32 times estimated 2024 earnings per share, a decrease from the 43 times seen at the end of 2022.
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