HVAC Stocks Sell Off on Concerns that Disruptive AI Technology Could Lessen Data Center Spending

Shares of heating, ventilation, and air conditioning manufacturers Carrier CARR, Johnson Controls JCI, and Trane Technologies TT sold off on Jan. 27 in reaction to the release of new artificial intelligence technology from Chinese company DeepSeek, which could redefine long-term growth expectations for data centers.

Why it matters: Carrier, Johnson, and Trane have increasingly emphasized the attractive growth opportunity from data centers. Carrier, for example, projected that the global HVAC market for data centers would more than double to $15 billion by 2027.

• DeepSeek’s R1 may rival the functionality of US-developed models at just a fraction of the cost, which could have implications for future data center spending. In the near term, we expect Microsoft MSFT, Amazon AMZN, Alphabet GOOGL/GOOG, and others to continue investing in data center expansion.
• Johnson has disclosed that data centers account for approximately 10% of its total revenue. Carrier pegged that number at 10% of commercial HVAC sales or a low-single-digit percentage of total sales. Trane hasn’t disclosed its exposure, but we think it’s likely within the range of its peers.

The bottom line: We’ve maintained our fair value estimates for Carrier ($53 per share), Johnson ($80), and Trane ($223).

• While we continue to see growth opportunities tied to data center expansion, we think the market’s long-term sales growth and margin expansion expectations for Carrier and Trane are still overly optimistic, and we see both stocks as overvalued.
• On the other hand, we view Johnson’s stock as fairly valued. The market has shown less enthusiasm for the company than its peers, perhaps due to its less consistent financial performance.