Big tech’s data center build-out has exploded from $24 billion in 2015 to $220 billion last year and an expected $320 billion this year, driven by insatiable demand for power and the need to keep servers cool.

Comfort Systems (FIX), a specialty HVAC subcontractor, is poised to benefit as data centers and broader infrastructure keep expanding.

With an almost $7 billion backlog, aided by 14 bolt-on acquisitions, and its mix shift into higher-margin electrical work, the firm was able to become a major player in the AI ecosystem and further consolidate a fragmented market.

Despite a peak profitability and continued growth, the market has concerns over data center capex and HVAC cyclicality.

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Last year, Microsoft (MSFT) spent $466 million to buy 124 acres of land in Northern Virginia for new data centers, just four years after the same plot of land sold for $46.9 million.

It has since invested $1 billion to restart the nuclear power plant on Three Mile Island and purchase the electricity generated there over the next 20 years.

Back in 2015, the biggest tech companies (Amazon, Google, Meta and Microsoft) spent a combined $24 billion on data centers. That number jumped to $95 billion by 2020 and $220 billion last year.

Spending is expected to exceed $320 billion this year alone. Companies are desperate for consistent energy, but that’s just half of the equation.

Proximity to energy is useless if data centers can’t keep servers from overheating. Less than 0.1% of electricity leaves the facility in the form of data signals.

Everything else becomes heat. At any given moment, large hyperscale data centers produce enough heat to warm around 35,000 homes throughout the winter months.

If the cooling shuts off, these centers would reach 100 degrees Fahrenheit in minutes. They’d hit 140 degrees within an hour, an inoperable temperature for data centers.

As such, along with building data centers and sourcing reliable energy sources, it is clear big tech companies will also be spending big on keeping data centers cool for years to come.

Comfort Systems (FIX) is an HVAC (heating, ventilation, and air conditioning) provider that focuses on industrial applications.

In other words, it is well set up to ride the tailwinds of AI investment, with nearly 40% of its revenue coming from technology customers.

Another 25% of its business comes from manufacturing end markets, which look well set up to benefit from onshoring and nearshoring trends and another 25% comes from more stable health care, education, and government end markets.

As such, Comfort Systems appears better shielded than its peers from challenges facing office and residential HVAC.

The company breaks its business down into two main segments, mechanical services (~80% of revenue) and electrical services.

Mechanical services include HVAC system installation, as well as plumbing and fire protection services.

Meanwhile, electrical services involve the installation and maintenance of electrical systems used to keep HVAC systems running.

Comfort Systems is the subcontractor of choice for big construction firms that call in to deal with these specialized parts of a project.

Customers love to work with Comfort Systems. It has an average customer relationship of 12.5 years, making it a reliable leader in the space.

Strong AI tailwinds and broader infrastructure spending have sent the company’s backlog soaring, which is up from $1.5 billion in 2020 to nearly $7 billion today. As Comfort Systems has won new business, it has expanded its reach.

The company has made 14 acquisitions in the past five years alone, many of which have been for the electrical segment, helping it achieve 25%+ growth in the past few years.

These are small, easy-to-integrate purchases that have helped Comfort Systems consolidate the market.

As electrical systems have grown, its gross margins have improved from 8% in 2020 to 24% today. Meanwhile, the mechanical segment has generated stable 20% margins.

Comfort Systems is a crucial player in the AI revolution. Its backlog is growing at breakneck speeds, and at the same time, the business is getting more profitable, recently reaching a peak Uniform return on assets ”ROA” of 50%+.

Despite this strong performance, the market has concerns over data center capex and HVAC cyclicality.

Our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform ROA to decline to 42% from 54% last year instead of continuing to climb like Wall Street predicts.

Comfort Systems has been able to leverage its consistent market presence to become a major player in the AI ecosystem and further consolidate a fragmented market.

The firm is a consistently high-quality performer, with strong growth prospects, and trading at a discount to the broader market, with a 19x Uniform P/E.

Comfort Systems appears to have significant equity upside potential. As such, it may be an interesting name for the investors betting on continuous data center capital expenditure.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research