Data Center Surge Fuels Comfort Systems' Growth, but Valuation Remains Stretched

What happened

Comfort Systems is ramping up data center construction, lifting technology projects to 42% of revenues and driving a record backlog with no immediate sign of demand cooling. This aligns with the master report's findings of a backlog surge to $9.38 billion at September 2025, heavily skewed toward tech and manufacturing sectors. The company has demonstrated strong execution, with revenue growth to $7.03 billion in 2024 and 26 consecutive years of positive free cash flow, supported by strategic acquisitions. However, the stock has more than doubled in the past 12 months and trades at about 41 times TTM earnings, significantly above a conservative DCF estimate of $282 per share. Despite the positive growth signals, this elevated valuation in a cyclical, bid-driven business offers limited margin of safety for investors.

Implication

The increased data center exposure provides a secular growth tailwind, enhancing backlog visibility and supporting near-term earnings stability. This could justify sustained high margins if execution remains disciplined, particularly in mission-critical niches. However, the stock's premium valuation means any slowdown in demand or margin compression could trigger sharp price corrections. The inherent risks of fixed-price projects, customer concentration, and non-residential construction cyclicality amplify downside potential not fully reflected in the current price. Therefore, while the business quality is solid, new capital is better allocated on a meaningful pullback to more reasonable valuations.

Thesis delta

The news confirms Comfort Systems' strategic pivot toward data centers, reinforcing the growth narrative and backlog strength highlighted in the master report. It does not shift the core investment thesis, as valuation concerns remain paramount, with the stock still trading at a large premium to intrinsic value and embedding aggressive expectations. Thus, the 'WAIT' stance is maintained, emphasizing the need for a price correction or clearer margin durability before considering a buy.