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Up 33% YTD, Is This AI Data Center Stock Overheated?
Over the last 15 months, stocks in the artificial intelligence (AI) space have gained significant traction, as investors and analysts have grown extremely bullish on this megatrend. According to a Statista report, the AI market is expected to widen to $827 billion by 2030, up from $136 billion in 2023, indicating a compounded annual growth rate of almost 30%. A rapidly expanding addressable market should allow the leaders in the AI race to grow sales and earnings at an enviable pace going forward.
One AI-related tech stock that has surged 33% since the start of 2024 is Trane Technologies (TT). Valued at $72.27 billion by market cap, Trane Technologies stock has returned 83% in the last 12 months and is up over 400% since May 2014.
Trane Technologies provides solutions for buildings, homes, and transportation. These include commercial heating and cooling systems, building controls, energy services, residential heating and cooling systems, and transport refrigeration systems.
Let’s see if you should buy this tech stock right now.
How Did Trane Tech Perform in Q1?
Trane Tech reported sales of $4.2 billion in Q1 of 2024, up 15% year over year. Moreover, its operating margin expanded by 250 basis points, allowing the company to end Q1 with an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 16.8%. Trane Technologies reported a backlog of $7.7 billion, up 10% from 2023.
During the earnings call, CEO Dave Regnery stated, “We continue to deliver a leading growth profile among industrials through relentless investment in our business, our proven business operating system, and focused execution in high growth verticals that play to our unique strengths.”
While revenue grew by double digits, adjusted earnings were up 38% year over year, allowing Trane Tech to raise its full-year revenue and earnings guidance for 2024.
What's the Forecast for Trane Technologies Stock?
A report from Markets and Markets projects the data center cooling market to more than double to $29.6 billion by 2030, providing Trane Technologies with room to grow its top line. The primary reason for growth in the data center cooling market is the rising amount of data created globally across AI and other verticals.
Out of the 18 analysts covering TT stock, five recommend “strong buy,” 12 recommend “hold,” and one recommends “strong sell.” The mean target price for TT stock is $309.86, which is lower than the current trading price, although the Street-high target of $366 is a premium of nearly 13% from here.
Trane Technologies expects organic sales to grow between 8% and 9% year over year in 2024. It also forecasts adjusted earnings between $10.40 and $10.50 per share in 2024. These forecasts suggest Trane Tech stock is priced at 30x forward earnings, which might seem steep. However, analysts expect the company’s adjusted earnings to expand by 13% annually, which is quite encouraging.
Additionally, Trane Tech pays shareholders an annual dividend of $3.36 per share, indicating a forward yield of 1%. In Q1 of 2024, it reported a free cash flow of $175 million and paid $190 million towards dividends, indicating a payout ratio of more than 100%. However, Trane Tech has more than tripled its dividend payments in the last eight years and emphasized it aims to deploy 100% of excess cash to shareholders over time.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
