Here’s the intro to Charles Mizrahi’s latest teaser ad:

“1 COMPANY = KEY TO UNLOCKING NEXT-LEVEL AI

“Dow 100K is coming.

“It’s not a matter of if … but when.

“And you don’t need to buy into the Dow Jones (DIJA) to benefit from its rise.

“The big gains will be made from the companies leading the AI disruption.

“When I see a mega trend like AI developing, I don’t waste any time.

“That’s why I just released a special video about a mid-cap AI company.”

And once you click through to the ad, here’s how it gets our juices flowing:

“URGENT: A White House Mandate Is Set To Unleash…

“The AI Patent Powerhouse

“One Firm Holds 2,740 Revolutionary Patents Critical to Unlocking $15.7 Trillion in New Wealth. Investing Today Could Be The Smartest Move You Ever Make.”

He also drops a bunch of names for this secret company’s partners…

“Google, Amazon, Meta and other major AI players including NVIDIA have all partnered with one company.

“A company I call the AI Patent Powerhouse.

So… will this company’s 2,740 patents turn into 10,000% returns over the next six years, as he says this is “the chance to invest in the ground floor of a company leading one of the biggest technological revolutions in history?”

Well, let’s figure out what his company is, see how the business is doing and what the valuation looks like, and then you can make that call and decide what to do with your money.

The ad is for Mizrahi’s 8-Figure Fortunes ($995/year, no refunds), and one hates to commit a thousand bucks to a newsletter before you’ve had a chance to think for yourself, particularly if all you’re really lusting for is the answer about this “secret” stock. So we’ll short-circuit that a little, get rid of the “secret”, and then, if you decide to shell out that cash for a subscription, at least you’ll have some perspective on the company first.

Much of the argument is that very few people and companies are actually using AI right now, and that the surge as it moves from a “single-digit percentage” will be shocking and phenomenal.

And Mizrahi says the recent “White House Mandate” on AI is “going to accelerate AI progress and thrust this patent powerhouse company into the limelight.”

What makes them unique? Mizrahi teases that they “solve the biggest hurdle that’s keeping AI from going mainstream”…

And the orders are coming in…

“The CEO of this company went on record saying: ‘We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders.'”

So what’s the story, and what’s the stock that Mizrahi thinks is in the “very first signs of the AI investment cycle?”

From those clues, the Thinkolator can pretty quickly confirm that the stock Mizrahi is teasing in “The AI Patent Powerhouse: Ride the Coming 10,366% Surge in Wealth” is the digital infrastructure service provider Vertiv (VRT), which has its roots as the computer cooling business of Emerson in decades past but was spun off as a separate business about a decade ago, acquired some other business to diversify beyond cooling equipment in providing other tools and services for data centers, including power management, racks, backup battery management and more, and then came public through a SPAC merger in 2020.

That “2,740 patents” number comes directly from their website…

And the “”We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders” quote from the CEO is not exactly new, in fact it may well be part of the reason for Vertiv’s surge over the past year, but that’s what he said on the conference call just under a year ago, when they were discussing their first quarter of 2023… here’s the full quote:

“Some hyperscalers are moderating CapEx growth, that this moderate growth is still healthy growth. And we see investment continuing. Additionally, we see some market reacceleration in the second half of the year, especially in China, which has been softer over the last several quarters. As Dave mentioned, there is significant secular growth story in our industry. This is further demonstrated by the acceleration of everything artificial intelligence in the tech space.

“We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders. Vertiv is uniquely positioned to win here, given our market leadership and deep domain expertise in areas like thermal management and controls, which are vital to support the complexity of future AI infrastructures.”

I wouldn’t imagine there’s any doubt that those orders started showing up in force over the past year, with Vertiv revenue growing by 20% i 2023… and today it seems quaint that everyone thought the hyperscalers would be “moderating CapEx growth” a year ago, no? Even Vertiv didn’t see how wild the AI-focused spending would become, as everyone tried to hoard NVIDIA chips and build ChatGPT competitors.

Here’s how Vertiv describes themselves:

“Vertiv brings together hardware, software, analytics and ongoing services to enable its customers’ vital applications to run continuously, perform optimally and grow with their business needs.

“Vertiv solves the most important challenges facing today’s data centers, communication networks and commercial and industrial facilities with a portfolio of power, cooling and IT infrastructure solutions and services that extends from the cloud to the edge of the network.”

We’ve talked a bit about Vertiv before, particularly last year when a couple different pundits were making recommendations of various cooling-related companies as a play on the dramatically increased processing power that next-generation AI chips require, which means more electricity consumption, and more heat being churned out by those faster chips, with a strong likelihood that if this trend continues, we’re going to need a lot more on-rack liquid cooling within data centers, the older air cooling just can’t keep up with the increased heat.

And investors love a “pure play,” with Vertiv looking like the most “pure play” liquid cooling company out there in the data center space last year, so the stock became somewhat “hot” story and soared higher. This is not a small company, but it has now become one of the more successful SPAC mergers, thanks to that run over the past year — at an $80 share price, this is a $30 billion company, and does have a real business, with almost $7 billion in revenue last year and more than $500 million in pre-tax income. Earnings per share came in at $1.21 last year, and they look like pretty high quality earnings — they do have a meaningful amount of debt, about $3 billion, so there is some real cost to that in the form of interest payments, but that still leaves them with close to $750 million of free cash flow, so this looks like a pretty high quality company.

There’s presumably a limit to the power of that quality, though. They primarily sell hardware to corporate customers, and this business is clearly much more competitive than Mizrahi implies (there are lots of providers for racks, cooling systems and other data center equipment) — if they were the only company that could “solve” the big hurdle of managing the increased power and cooling demands of AI processing, then they would be able to charge a lot more. Monopolies don’t tend to have single-digit net income margins. On that front, Vertiv has been getting better, in part through acquisitions and in part through scaling up the business, but their net income margin over the past three years has come in at 2.4%, 1.4% and, in 2023, a new high of 6.7%. That’s a very good year, and a significant improvement, so maybe margins will improve in 2024 and beyond, as orders come in for more (cooler and faster) data centers.

Some of the positivity from investors is based on the leadership — particularly David Cote, who is credited for being the force behind Honeywell’s phenomenal success a decade ago, and who serves as Executive Chairman — but it’s really just about growth in data centers, juiced by further acceleration in data center spending for artificial intelligence. The CEO, Giordano Albertazzi, provided a pretty good interview to Schwab back in November, which gives some sense of where they think things are going:

And if you prefer the powerpoint slide version of things, the full year 2023 presentation provides plenty of reason for optimism as well.

The challenge, of course, is how much you want to pay for that optimism and growth — the shares have doubled since the CEO gave that interview, and are up about 35% since the February release of those 2023 numbers, but the 2024 expectations have not really changed in that time, so the surge has all been from the expansion of the multiple (going from about 20X forward earnings to 37X).

Improvement is certainly the expectation of analysts right now, as you would expect, but that’s been true for the past six months with this one — companies that aren’t growing don’t trade at 50X adjusted earnings (or if you want to be a stickler, 70X GAAP earnings). The current estimate is that VRT will grow its adjusted earnings to $2.29 in 2024, which is a hair above the “$2.20-2.26” guidance they provided last quarter, on “organic net sales growth” of about 10%, then further to $2.91 in 2025. That means they’re in the midst of a multi-year run that should have them growing earnings by an average of about 25% per year… assuming the analysts are correct in their forecasts. If that’s how the story plays out, then the current price can certainly be justified — if you can grow earnings at a 25% clip, then I can tolerate paying up to 50X earnings, if that growth rate is really sustainable and predictable.

So at about 37X the current estimate for 2024 adjusted earnings, and about 39X expected (adjusted) free cash flow, they’re probably near the top end of a “reasonable” valuation range for a high-growth company, with a PEG (price/earnings ratio divided by expected growth rate) of about 1.5. That’s not cheap, but it’s also not above the 2.0 level that I generally consider to be the most optimistic price I’d want to pay for these kinds of companies.

Which means Vertiv shares here are indeed a bet on data center spending picking up fast, and on the company beginning to earn better margins on those sales as the high level of demand makes customers less price-sensitive, benefiting from what they say is their better portfolio of focused products and services (including the acquisition of a “liquid cooling on chip” company last year, Coolterra).

Maybe that’s how it will play out, we’ll see — they originally came public through a SPAC transaction, and the valuation at that time was 9X the expected adjusted EBITDA (they forecasted adj. EBITDA of $595 million in 2020, and the SPAC deal gave them a valuation of $5.3 billion). The clearest indication of how the surge in AI demand has changed the story is the move from that valuation, which did not particularly excite investors from 2020 through 2022, to the current valuation — the un-adjusted EBITDA for the past year is just a hair under $1 billion, so VRT now trades at about 30X EBITDA. Or if you want to be probably more reasonable and include the debt, the Enterprise Value (EV) is about 34X EBITDA. That’s a HIGH GROWTH valuation, no matter how you slice it.

Doesn’t mean it won’t grow — certainly the expectation is there, and if expectations are exceeded then the stock will likely do fine, particularly if they can continue to improve their margins as they grow. But it does mean that there’s no room for a bad quarter, or for lowered expectations, if any of the “AI spending is going bonkers” story unravels, even a little bit.

My impression is that if you assume data center capital spending (for new data centers and upgrades) will continue to grow to meet the AI demand, which seems reasonable, then the primary risk is that Vertiv is going up against a lot of much larger companies in most of their product areas — maybe they continue to take share from folks like Eaton and Carrier and Shneider, because they’re more focused or have better products, but there’s a risk that those companies, which are also soaring in value, might be willing to accept lower margins, or expand production more efficiently, and keep a lid on Vertiv’s profitability. That’s all a judgement call, one that I don’t know enough about Vertiv to make — and all of those larger competitors are also soaring in valuation over the past year, to be clear, so it’s not like Vertiv is way out of line, most of the other electronics giants who provide services and equipment to the data center sector are growing much more slowly, but are also valued at premium multiples, generally about 30X earnings.

Vertiv will report its first quarter earnings next week, on the morning of April 24th, so the story could change quickly. I know the stock has come up in our pages a few times, and I suspect there are some Vertiv shareholders out there among the great Gumshoe readership, so if you’ve got thoughts on their growth potential, or think the stock is particularly appealing (or unappealing) as we head into next week’s earnings update, please let us know with a comment below. Thanks for reading!