Bank of America has upgraded Johnson Controls to a “Buy” rating, citing the industrial company’s significant exposure to the booming AI data center market. The bank increased its price target to $80 from $76, representing approximately 15% upside potential from current trading levels.
Johnson Controls, known for manufacturing security cameras and HVAC systems, has emerged as a major player in the AI infrastructure space. The company is the second-largest provider of thermal equipment with approximately 15% market share, holding a leading position in the chiller market. Beyond cooling systems, Johnson Controls also supplies building automation systems, security, and fire protection equipment to data centers.
Data centers are expected to generate about $4 billion in revenue for Johnson Controls this year, representing roughly 14% of the company’s total business. This exposure is more than triple that of its closest competitors, including Trane Technologies and Carrier, positioning Johnson Controls as a unique investment opportunity in the AI infrastructure space.
One of the company’s most sought-after products is its liquid-cooling systems, which are critical for managing the immense heat generated by AI-focused servers. According to Bank of America analyst Andrew Obin, one megawatt of power supplied to a data center requires approximately 285 tons of cooling—equivalent to the cooling needs of a 115,000 square foot commercial building. Johnson Controls’ water-cooled centrifugal chiller and computer room air handling products are specifically designed to meet these demanding requirements.
Beyond its AI data center exposure, Bank of America highlighted several potential catalysts for the stock. The company is currently searching for a new CEO, with an announcement expected before year-end. Combined with activist investor involvement, this leadership change could signal a new strategic direction for the company.
From a valuation perspective, Johnson Controls offers an appealing margin of safety compared to other AI stocks. The company trades at a forward price-to-earnings ratio of 18x, lower than both its HVAC peers and the broader S&P 500’s valuation of approximately 21x. Bank of America notes that if Johnson Controls were to re-rate in line with its HVAC peers, it would imply a 57% higher valuation. Shares have already surged 22% year-to-date as investors recognize the company’s AI infrastructure exposure.
Key Quotes
We find that JCI is the second-largest provider of thermal equipment (~15% market share), with leading market share in chillers. JCI also sells building automation systems, security, and fire protection equipment into data centers.
Bank of America analyst Andrew Obin explained Johnson Controls’ dominant position in the data center cooling market, highlighting the company’s comprehensive product portfolio that extends beyond just thermal management to include security and fire protection systems.
One megawatt of power supplied to a data center requires approximately 285 tons of cooling, similar to the requirements for a 115,000 square foot commercial building.
Obin provided this striking comparison to illustrate the massive cooling requirements of modern AI data centers, emphasizing why Johnson Controls’ liquid-cooling systems and thermal management products are so critical to AI infrastructure.
We expect a new CEO announcement before the end of the year and view this as a positive catalyst. Combined with activist investor involvement, we believe this potentially signals a new strategic direction for the company.
Obin identified the upcoming leadership change as a key catalyst that could unlock additional value for shareholders, particularly when combined with pressure from activist investors to optimize the company’s strategic direction.
JCI hypothetically re-rating fully in line with the average of these HVAC peers would imply a 57% higher valuation.
The analyst highlighted the significant valuation gap between Johnson Controls and its competitors, suggesting substantial upside potential if the market fully recognizes the company’s AI data center exposure and re-rates the stock accordingly.
Our Take
Johnson Controls represents a compelling case study in how traditional industrial companies can become AI plays through infrastructure exposure. While investors have bid up semiconductor and software companies to stratospheric valuations, essential infrastructure providers like Johnson Controls trade at reasonable multiples despite having direct, growing exposure to AI spending. The liquid-cooling systems are particularly important as AI chips generate far more heat than traditional servers, making advanced thermal management non-negotiable. With only 14% of revenue currently from data centers and the AI buildout still in early stages, Johnson Controls has substantial room for growth. The combination of valuation discount, activist involvement, and new leadership could create a perfect storm for shareholder value creation, making this one of the more interesting indirect AI plays in the market today.
Why This Matters
This story highlights a critical but often overlooked aspect of the AI boom: the massive infrastructure requirements needed to support AI computing. As AI models become more powerful and widespread, the cooling and power management systems that keep data centers operational become increasingly vital. Johnson Controls’ position as a leading provider of these systems represents a “picks and shovels” approach to AI investing—profiting from the infrastructure buildout rather than betting on specific AI technologies.
The company’s valuation discount relative to both AI high-fliers and traditional peers suggests the market may still be underappreciating its AI exposure. With data centers requiring exponentially more cooling capacity to handle AI workloads, and Johnson Controls controlling 15% of the thermal equipment market, the company is positioned to benefit from sustained AI infrastructure spending. The upcoming CEO change and activist involvement could unlock additional value, making this a compelling opportunity for investors seeking safer AI exposure without the volatility of pure-play AI stocks.
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