AI Picks and Shovels (Arc 3: Keeping it Alive): Vertiv (NYSE: VRT) — The Cooling System

Picks and Shovels Series | Arc 3: Keeping it Alive | Part 1 of 3

Nvidia designs the brain. Arc 1 covered the foundry, the custom silicon, and the merchant challenger that try to turn that design into chips. Arc 2 covered the switching fabric that moves the traffic, the memory that holds the weights, and the interconnect landlord that houses the racks. Every one of those pieces converts electricity into computation and waste heat. At traditional densities — five to ten kilowatts per rack — air conditioning was enough. At the densities now required for training and inference clusters, it is not.

Vertiv (NYSE: VRT) is the thermal management company that has positioned itself as the answer to that physics problem.

The Physics Shift

A modern AI rack already runs at 40–100+ kW. Vertiv’s own high-density reference designs for NVIDIA Blackwell-class systems show 127–142 kW racks with 70–77 % of the heat removed by direct-to-chip liquid loops and the balance by air. The company is already talking about 600 kW and megawatt-class scenarios. Air simply cannot move heat at those rates without prohibitive fan power, noise, and floor space. Liquid can, because water (or dielectric fluid) has roughly three thousand times the heat capacity of air.

That is why liquid cooling has moved from niche HPC to the basis of design for new AI capacity. Vertiv supplies the full thermal chain: cold plates and coolant distribution units (CDUs) at the rack, heat rejection plant (chillers, dry coolers, rear-door heat exchangers), and the controls that keep the loops stable when GPU power envelopes spike. Recent acquisitions — Strategic Thermal Labs for server-side cold plates, ThermoKey for heat rejection, PurgeRite for the flushing and filtration services closed-loop systems require — have pushed it further into integrated, higher-margin system wins. Management has said liquid solutions now appear in the majority of its AI customer engagements.

The Backlog and the Visibility

The demand signal that matters is the order book. Vertiv exited 2025 with a backlog of approximately US$15 billion, more than double the prior year, after a fourth-quarter book-to-bill near 2.9. It has since stopped publishing the quarterly backlog number, so the cleanest remaining proxy is deferred revenue, which roughly doubled to about US$3.6 billion by the end of the second quarter of 2026 on advance payments and milestone collections. Customers are paying ahead to secure capacity.

Q2 2026 net sales were US$3.27 billion, up 24 % year-on-year. Adjusted operating margin reached 22.6 %. Management raised full-year 2026 guidance to a midpoint of roughly US$14 billion in sales (approximately 37 % year-on-year growth, of which organic growth is guided around 31 %) and adjusted EPS of US$6.70. At Friday’s close of US$242.78 that implies a multiple around 36× the current-year midpoint. The valuation already prices a multi-year conversion of the backlog into revenue and margin. Execution risk remains: multiphase projects and temporary supply-chain congestion have already pushed some revenue out of quarters, and the customer base is concentrated among a handful of hyperscalers.

Competition and the Bottleneck

Schneider Electric is the broader rival, with a much larger balance sheet and a cooling business strengthened by the Motivair acquisition. Munters is the pure-play climate specialist expanding US capacity for high-density chillers and CDUs. Eaton (via Boyd Thermal), CoolIT, and a long tail of specialists contest pieces of the stack. None of them has Vertiv’s combination of power and thermal breadth plus the recent string of liquid-cooling acquisitions. The practical bottleneck, however, is not market share. It is that cooling has become as real a constraint as chips or grid power. You can book the GPUs and the interconnect; if the heat cannot leave the rack, the cluster cannot run at design density.

The Aussie Angle

Australian data-centre operators face a tighter version of the same problem. Grid connection is already the binding constraint in Sydney and Melbourne; AEMO forecasts show data-centre demand rising sharply and competing with household load. Ambient temperatures are higher and free-cooling hours fewer than in much of the US. Wholesale electricity is more expensive. In that environment the efficiency delta of liquid cooling is larger, not smaller: direct-to-chip loops can run at warmer facility-water temperatures, cutting both PUE and water use relative to evaporative systems. Closed-loop designs also reduce the water-intensity objections already appearing in planning hearings.

For an Australian investor the usual overlays apply. The equity can be held directly via an international broker or indirectly through US indices and superannuation vehicles. Any capital gain or loss is measured against an AUD cost base, so the AUD/USD rate on entry and exit matters. There are no franking credits. The cash flows sit in a market whose power and thermal economics — grid connection queues, ambient temperatures, wholesale power prices — are not identical to Australia’s. Those differences do not invalidate the thesis, but they do mean the local operating conditions that make liquid cooling more valuable in Australia are not automatically the same conditions that determine Vertiv’s reported margins.

The Investment Case — In One Line Per Side

Bull case: Vertiv is the thermal systems company that has assembled the broadest power-plus-cooling stack for high-density AI, with liquid solutions already appearing in the majority of its AI engagements, a backlog that doubled into 2025, deferred revenue that roughly doubled again by mid-2026 on customer prepayments, and guidance that already embeds roughly 37 % sales growth and a 22 %+ adjusted operating margin.

Bear case: The stock already prices multi-year conversion of that backlog at roughly 36× the current-year EPS midpoint; revenue recognition on large multiphase projects has already slipped quarters; the customer base remains concentrated among a handful of hyperscalers; and Schneider, Munters, and the specialist liquid-cooling names are all expanding capacity into the same bottleneck.

Honest read: Cooling has become a genuine constraint on cluster density, and Vertiv is one of the better-positioned suppliers. The valuation assumes the company can keep converting the order book into margin without major execution or competitive slippage. That is a high bar, not an impossibility.

Cooling only matters if there’s power to cool in the first place. Next week we look at the operator that runs the largest nuclear fleet in the United States, is restarting a mothballed reactor under a twenty-year offtake with a hyperscaler, and has signed multiple long-duration contracts to supply carbon-free baseload to the same data-centre loads that need the cooling.

Data Sources:

• Vertiv Q2 2026 earnings release and investor call, 29 July 2026
• Vertiv Q4 2025 results commentary on backlog and book-to-bill
• Vertiv high-density liquid cooling reference designs for NVIDIA Blackwell systems
• Company statements on liquid cooling prevalence in AI engagements and recent acquisitions (Strategic Thermal Labs, ThermoKey, PurgeRite)
• Share price data as of close 9 October 2026

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