Should You Ignore Vertiv? Why ON Semiconductor May Be The Better AI Infrastructure Stock Today
Key Points
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Vertiv offers strong near- and medium-term exposure to AI infrastructure.
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ON Semiconductor has greater long-term potential in physical AI.
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Valuation differences reflect market expectations for each company.
AI data center infrastructure company Vertiv(NYSE: VRT) and power and sensing chip company ON Semiconductor(NASDAQ: ON) offer investors different approaches to the AI infrastructure market. Vertiv obviously offers more up-front and near-term pure exposure to the AI investment theme, but I think ON Semiconductor offers more long-term upside potential.
Understanding AI infrastructure
Hyperscalers are spending mammoth amounts on building out AI infrastructure, but it’s less appreciated that the nature of AI spending will change over time. You can think of it as two heavily overlapping, loosely defined phases.
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First, there is the AI build-out phase, during which large language models (LLMs) are built and trained, and inference (running models to power autonomous agents) occurs.
The second phase is when models move out of the cloud and into physical AI, where inference occurs at the edge. You can think of this as an AI-powered robot or an electric vehicle (EV) performing inference close to where data is collected, rather than in the cloud.
Vertiv and ON Semiconductor
Over time, it’s likely that, after the initial massive investment in the first phase, spending in the second phase will take over and grow over the long term. All of this leads us to where Vertiv and ON Semiconductor fit in. Both are partners of Nvidia in developing technology for AI data centers, but they have vastly different investment profiles.
|
Company |
First Phase (AI infrastructure build-out) |
Second Phase (Physical AI Infrastructure) |
|---|---|---|
|
Vertiv |
Heavy exposure due to its power, cooling solutions, and data center architecture |
Exposure to inference in the cloud, but only indirect exposure to physical AI growth |
|
ON Semiconductor |
Relatively small but fast-growing data center business |
Heavy exposure to physical AI through its power and sensing business, and the forthcoming $7 billion acquisition of edge solutions company Synaptics |
Data source: Author’s analysis.
The investment case for Vertiv and ON Semiconductor
Vertiv offers investors a pure-play AI infrastructure build-out play for the first phase and indirect exposure to the second phase — after all, as physical AI grows, it will also drive growth in digital infrastructure. In addition, Vertiv’s exposure to the new generation of data centers, in which Nvidia is leading development, makes it a key player for years to come.
Investors buy Vertiv stock for the certainty of its medium-term growth and the upside potential from a ramp-up in hyperscalers’ spending plans, a key reason why the stock has outperformed this year.
In contrast, ON Semiconductor’s current data center exposure is expected to account for only $500 million of its almost $6.5 billion in revenue in 2026. The company’s traditional key end markets are power and sensing chips for EVs and industrial applications, including EV charging, renewable energy, and industrial automation, among others.
Image source: Getty Images.
That said, its data center business is set to double in 2026, and its intelligent power, sensing, and control solutions make it a key player in physical AI. It’s also an Nvidia partner for the new generation of high-power data centers. Moreover, management recently decided to fill the missing link in its physical AI exposure by adding connected compute capability with the $7 billion acquisition of Synaptics.
This means that, for example, in an industrial robot, ON Semiconductor will be able to offer the sensors to collect data, the power management system to efficiently drive the robot, the control technology to command the robot’s motors and motion, and now, with Synaptics, it will have edge AI computing power to make real-time decisions.
Valuation matters
The comparison between the two is somewhat reflected in the valuation discrepancy, whereby investors are willing to pay much more for Vertiv’s medium-term AI exposure than for the promise of ON Semiconductor’s long-term growth.
Here’s a look at the Visible Alpha Wall Street consensus estimates for a commonly used valuation metric: price-to-free-cash-flow.
Data source: Visible Alpha. *Does not include Synaptics.
Which stock to buy?
Buy Vertiv if you think there’s upside potential in AI spending plans, because it will definitely be a beneficiary. Still, the stock is probably worth avoiding on valuation grounds if you think there’s no more upside potential left.
ON Semiconductor is a significantly cheaper stock, but to own it, you will have to value heavy EV/industrial exposure and the relatively smaller medium-term AI exposure and believe management can integrate Synaptics successfully. I think the latter is a more compelling option because there’s little doubt that physical AI (including autonomous driving and robotics/automation) is the future.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Vertiv. The Motley Fool recommends ON Semiconductor and Synaptics. The Motley Fool has a disclosure policy.
