This niche AI play is seeing business growth rates that are triple the pace of the data centers

Vertiv and Modine are legacy air cooling players that entered the liquid cooling market through acquisitions, while nVent is a pioneer. Unlike traditional air cooling — which relies on air conditioners, fans and vents to blow cool air over racks of servers — the technology uses a liquid coolant to absorb and remove heat right where it’s generated.

“The need for liquid cooling is not cannibalizing the need for mechanical (air) cooling,” Matt Summerville, an analyst at D.A. Davidson said in an interview. Instead, he expects data centers will use a hybrid of legacy air conditioning and liquid cooling systems to protect IT equipment from heat damage and for overall environmental control in data centers.

Liquid cooling, still a nascent industry, is growing sales at a rate of 45% a year — three times faster than the 15% growth rate in data centers. The total addressable market for liquid cooling is roughly $3 billion, with about 5% of data centers using it, analysts said. They expect that to accelerate.

“The AI-driven side of the liquid cooling market is expected to be in 25% of all data centers by 2028,” Summerville said.

As one of the top five companies in the world involved in data center cooling, nVent, is very well positioned to benefit, William Blair analyst Brian Drab said.

The company has been in the liquid cooling business for well over a decade, giving it the time to refine and innovate its products. Originally invented 15 years ago for high-end mechanical equipment, nVent stumbled upon a major opportunity in data center cooling.

“They invented the liquid cooling business,” RBC Capital Markets analyst Dean Dray said, describing how data center operators discovered nVent’s products were exactly what was needed to cool high-powered servers. This kicked off relationships that nVent has “with literally all of hyperscale players,” and quietly made it a key partner in designing and testing thermal solutions for every generation of GPUs and chips, he explained.

Dray said nVent is “very guarded” about those partnerships, but will eventually need to figure out how to “explain their market presence and all of the hyperscale players they’re doing business with to get investors comfortable that these relationships exist.”

The company’s core product is a coolant distribution unit — what Drab called the “brains of the liquid cooling system connected to the racks in the data center.” This state-of-the-art liquid cooling technology “knows how hot a chip is and delivers liquid to it – and it’s doing it with thousands of chips throughout the data center,” Drab explained. He has an outperform rating on nVent with an $80 price target, or nearly 10% upside from Friday’s close.

Currently, nVent’s total revenue exposure to data centers is 23%. Half of that comes from liquid cooling, which is growing more than 40% annually. The other half comes from the electrical equipment for data centers, which is growing 15% annually.

Vertiv has a much larger exposure to liquid cooling, with 75% of its revenue tied to data centers. The company entered the market through the acquisition of CoolTerra in December 2023. Before that, it was primarily in legacy air conditioning.

Jefferies’ analyst Saree Boroditsky estimated Vertiv’s data center revenue could grow at a compound annual growth rate of 20% over the next four years, well above the 9% to 12% top line growth management projected at its December 2023 investor day.

This week, Boroditsky initiated coverage of Vertiv with a buy and a price target of $125, or about 12% from where the stock closed Friday.

The Jefferies analyst expects Vertiv earnings to grow at 24% CAGR through 2027 given its “strong incoming backlog,” which could provide upside to 2025 estimates. Boroditsky also noted the company’s $5 billion balance sheet capacity, which could be used for acquisitions or share buybacks, providing more upside for the stock.

Modine is a third standout that historically had a rapidly growing air-cooling business. The company recently made its way into liquid cooling. In the beginning of 2024, Modine purchased intellectual property assets of TMG Core, a specialist in liquid cooling technology to accelerate data center growth. Modine’s second purchase this year was the addition of Scotts Springfield Manufacturing, a manufacturer of air handling units, adding more products to its data center solutions portfolio.

These acquisitions will help with Modine’s data center business, which is already on pace to grow about 50% in 2024 as management focuses on higher growth end markets like cooling solutions.

At its investor day on Sept. 11, Modine provided a forecast for top-line CAGR of 18% to 22% through fiscal 2027 in its climate solutions segment where the data center business is housed, above its previous target range of 15% to 20%.

A major reason behind the higher targets is the expansion of Modine’s partnerships with hyperscalers. The company recently signed a deal with its third major customer.

“Being able to continue to penetrate these AI pioneers is absolutely going to be key for Modine to maintain market growth on an organic basis,” Summerville said. He added, the company is broadening its reach with plans to serve the Asia Pacific market, where data center activity is ramping up.

Another catalyst for Modine is the company’s commitment to having a CDU available in the market by the end of its fiscal year in March. Summerville gauges, “early excitement around the launch of their cooling distribution unit” as big data center players bring more capacity online.

Following Modine’s investor day, Summerville updated his price target on Modine stock to $155 from $140, implying 15% upside from Friday’s close, while maintaining a buy rating on shares.