Cooling for AI is a hot stock market trade–for now

Electricity consumption for data centers in the U.S. is expected to grow around 30% from 2022 to 2026 to 260 terawatt-hours, according to the International Energy Agency. (File Photo: Getty Images via AFP)
Electricity consumption for data centers in the U.S. is expected to grow around 30% from 2022 to 2026 to 260 terawatt-hours, according to the International Energy Agency. (File Photo: Getty Images via AFP)

Summary

Companies like Vertiv that can help artificial-intelligence data centers dissipate heat have had gains of more than 600%.

Artificial intelligence is hot. Literally.

The explosive growth in AI has generated soaring energy demand in data centers, and lots of unwanted heat. That has cooked up opportunities for companies providing cooling systems for servers.

Electricity consumption for data centers in the U.S. is expected to grow around 30% from 2022 to 2026 to 260 terawatt-hours, according to the International Energy Agency. That is around 6% of total electricity demand in the country or enough to power 24 million American homes for a year. And most of that energy will dissipate as heat, which means a higher need for cooling systems.

Ohio-based Vertiv Holdings is one company riding the wave, providing both power and cooling systems for data centers. Its shares have surged nearly 700% since the end of 2022. Vertiv saw a 60% year-over-year increase in orders last quarter, excluding foreign exchange impact. That led to a record order backlog of $6.3 billion at the end of March. Around a third of the company’s sales came from thermal management for data centers.

Currently most data centers use fans to circulate air to keep temperatures down. But more powerful, and thus hotter, chips will stretch the limits of such air cooling systems. One way to overcome that is to run liquid coolant in pipes through servers to absorb heat. Liquid has higher heat capacity and transfers heat more quickly. For the same volume, water takes more than 3,000 times more heat than air to raise its temperature by one degree. More efficient cooling systems also allow data centers to pack servers closer together.

Goldman Sachs estimates that the server cooling market will reach $10.6 billion in 2026 from $4.1 billion this year. Within that market, liquid cooling will become more popular, with its penetration rate reaching 57% among AI servers in 2026, compared with 23% this year, according to the bank’s forecast. That will translate to better margins for cooling system providers given those systems’ more complex system design. Liquid cooling systems cost three to four times more than air cooling systems, according to J.P. Morgan.

Like those of U.S.-based Vertiv, shares of Asian manufacturers for components used in cooling systems have soared too. Shares of Taiwan’s Asia Vital Components, or AVC, have risen 600% since the end of 2022 while Auras Technology, also based in Taiwan, has gained 510%. Both companies are ramping up their production capacity to meet rising demand. Vertiv acquired CoolTera in December to boost its liquid cooling technology.

With technology giants from Microsoft to Meta pouring money into AI data centers, the excitement over cooling tech stocks is natural. But their shares are now trading at more than 40 times expected earnings, according to FactSet, compared with multiples below 20 before the AI frenzy. That has priced in a lot of growth potential already in a nascent industry whose future is difficult to predict.

Selling picks and shovels in the AI gold rush has been a winning trade, but investors need to keep a cool head.

Write to Jacky Wong at jacky.wong@wsj.com

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