VNET Stock Has Surged 700% on AI Demand. Can It Keep Rallying?

Key Metrics for VNET Group

• Fair Value Estimate: $4.00
• Morningstar Rating: ★
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High

After years of declines, VNET Group VNET stock is on the rebound, riding the wave of demand from artificial intelligence companies. While the unveiling of DeepSeek’s R1 model was seen as bad news for semiconductor chip makers, it was deemed likely to spur a boom in demand for VNET’s business. The result has been a massive rally. Even with a recent pullback, its share price has tripled in the last three months to roughly $12 per share.

The question is now whether VNET stock has risen too far and too fast. Morningstar senior equity analyst Dan Baker says that while data center demand has picked up, “The company’s share price has shot through our fair value estimate, so we don’t feel the rally has been warranted by the fundamentals.”

Why Was VNET Falling?

This is a significant change of fortune for the company. In 2020, the stock rallied more than five times as it rode a Chinese tech boom, only to come crashing down. From its peak of $41.72 per share in early 2021 (when Baker notes that it was trading at a hefty seven times its book value), VNET stock lost nearly 94% of its value by the start of 2024.

Baker explains the fall: “The initial stages of the selloff were driven by a bursting of this tech bubble. Then we saw the Chinese data center market slowing down and given data center companies employ high leverage, this slowdown meant that VNET’s financials were in peril, especially by the end of 2023.”

VNET avoided financial collapse by raising $100 million from Singapore’s Temasek and $299 million from Shandong Hi-Speed Holdings Group. This let the company hold on until 2024, when demand for its data centers began to pick up.

AI Demand and VNET’s Outlook

VNET’s outlook began to brighten in 2024. “Chinese AI demand seemed to be around a year behind most of the rest of the world,” Baker notes. He says the firm’s continued purchase and construction of data centers around Tier 1 Chinese cities like Shanghai, Beijing, Shenzhen, and Guangzhou has positioned it to expand flexibly in its key markets. “In July 2024, due to strong orders and new projects under construction, the year’s capex guidance was increased from a midpoint of CNY 3.95 billion to CNY 5.25 billion,” he says.

One significant catalyst in 2025 has been the successful product launch by DeepSeek, China’s answer to major US language models. “To the extent that DeepSeek sparks further investment in AI in China and therefore more demand for data centers, this should help the outlook for demand for VNET’s data centers,” says Baker. However, he cautions that “putting numbers around this is very speculative at this point.”

Baker says surging demand for data centers could be a short-term headwind for the company. “Because new data centers can take five years or even longer, from when a company starts working on a new site acquisition to when that data center site is actually profitable, demand picking up can be negative for near-term profitability because there are more unprofitable sites in the mix.”

Is VNET Stock a Buy, a Sell, or Fairly Valued?

Despite its recent rally, Baker believes the stock is fundamentally shaky, pegging its fair value at $4 per share. “When it was trading at a price/book ratio of less than 1 (less than 0.5 at times), we were happy to recommend buying. But it is now over 3 times, and this looks too pricey,” he says.

Investors should also consider VNET’s lack of an economic moat, which means Morningstar does not see the company as having long-term competitive advantages. “We believe the bargaining power of its large hyperscale customers will offset the switching costs normally associated with the data center industry,” Baker explains.

Baker has simple advice for current and prospective investors: “Look to sell.”

The following are excerpts from Baker’s company report on VNET.

Economic Moat

We give VNET a no-moat rating, as we believe the bargaining power that its large hyperscale customers will have will offset the switching costs normally associated with the data center industry. We also believe that new capacity that is being deployed in outer suburbs will not enjoy the scarcity of data center space that its data centers near the CBDs in large Chinese cities do. Overall, we see little differentiation between data centers except for location.

Find more of Baker’s analysis of VNET’s economic moat here.

Fair Value and Profit Drivers

Our fair value estimate for VNET is $4 per share. We assume VNET grows its revenue at an average 10% per year over the next five years, with operating margin improving from negative 1.2% in 2022 to 24.6% in 2028. The margin improvement is because we assume a lower growth year in the terminal year of our forecasts with a greater percentage of mature data centers compared with lightly loaded or under-construction data centers. Our forecasts assume 47% consolidated EBITDA margin by the end of 2028.

Find more of Baker’s analysis of VNET’s fair value estimate here.

Risk and Uncertainty

We assign VNET a Very High Morningstar Uncertainty Rating. The main risk areas we see are competition risks, particularly if and when demand growth slows. If demand slows quickly, we could see a period of oversupply of data centers. China will strive to reach peak carbon dioxide emission before 2030 and achieve carbon neutrality before 2060, which could curb VNET’s potential growth. During periods of fast-rising electricity prices, VNET’s margins could be squeezed, as some of its shorter-term retail contracts do not have automatic power price resets. Managing growth with a balance sheet that has at times been stretched is also an ongoing risk.

Find more of Baker’s analysis of VNET’s risk and uncertainty here.

VNET Bulls Say

• VNET’s rapid expansion leaves it well positioned to capitalize on the huge demand for data centers brought on by cloud usage and a more data-dependent world.
• The Internet of Things, artificial intelligence, and other innovations that increase the demand for data and connectivity leave us in the early innings of a data center renaissance.
• We believe VNET’s large retail customer base will be less likely to churn and allow higher margins than its wholesale base.

VNET Bears Say

• VNET’s data centers are not significantly differentiated from those that others, including its biggest customers, could supply.
• VNET has spent too much and expanded too rapidly, and it will not hold up well if the industry cools and it can’t cover its borrowings.
• VNET has large and financially strong competitors in the three large Chinese telcos. Their data centers already have four to seven times the total capacity of VNET’s, and they have aggressive expansion plans.