2 Stocks for What’s Next in AI

Eaton’s North American data center business grew about 65% year-over-year in the second quarter. (Dreamstime)

Key Points

• Baird analyst Luke Junk initiated coverage of electrical equipment makers Eaton and Hubbell with Buy ratings.
• Junk set a $500 price target for Eaton and a $550 price target for Hubbell.
• Eaton stock trades for about 28 times earnings expected over the coming 12 months, up from 26 times a year ago. Hubbell trades for about 22 times, similar to a year ago.

AI data centers need a lot of power, which is straining electrical infrastructure. Changes are coming that benefit two makers of electrical equipment.

On Thursday, Baird analyst Luke Junk launched coverage of Eaton and Hubbell . Eaton makes power and thermal management products for AI data centers and other commercial and utility customers. Hubbell makes grid connection technologies, among other things.

Junk rates Eaton stock Buy and has a $500 price target for shares. The stock was up 0.8% at $418.46 in early trading on Friday. The S&P 500 was up 0.4%.

He rates Hubbell stock Buy, too. His price target is $550 a share. The stock was up 1.2% at $475.46 in early trading.

Both stocks are fundamental AI infrastructure plays. Eaton is “well-equipped for the upcoming transition to 800-volt direct current” data center architecture, says Junk.

Server racks full of Nvidia GPUs require more and more power. Today’s racks need, perhaps, 100 kilowatts of power. Typically that is delivered using 480-volt alternating current from a utility, which is converted to 54-volt direct current inside the data center.

Rack power needs are going to 1,000 kilowatts, or one megawatt, soon. With existing electrical architecture, the electrical current needed would be very high, generating a lot of heat. Higher voltages can make the system more efficient and require less copper.

Eaton products help enable the change. Hubbell products connect data centers to power.

Junk’s call and the new architecture highlight just how much business is available to industrial companies. Capital spending from nonfinancial S&P 500 companies, which account for the majority of capital spending, is expected to be $1.8 trillion in 2026, up from about $650 billion in 2021, according to FactSet. Spending in 2029 is expected to top $2.1 trillion, with the Magnificent Seven accounting for more than half of that.

The numbers are big.

Overall, 56% of analysts covering Hubbell stock rate shares Buy. That’s about average. Typically, 55% to 60% of analysts covering S&P 500 companies rate shares Buy. The average analyst price target for Hubbell stock is $571.

For Eaton, 77% of analysts rate shares Buy. The average price target is about $488 a share.

Eaton stock trades for about 28 times earnings expected over the coming 12 months, up from 26 times a year ago. Hubbell trades for about 22 times, similar to a year ago.

The S&P 500 trades for about 20 times expected earnings.

Write to Al Root at allen.root@barrons.com.

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