AAON, Inc. (AAON): Riding the Data Center Wave Through Margin Headwinds

The data center boom is one of the most critical growth vectors in modern infrastructure, and AAON, Inc. (AAON) is positioned to capitalize on it. Despite a Q1 2025 earnings miss tied to margin pressures, AAON’s strategic investments—most notably its $174.5M data center order pipeline and the expansion of its Memphis facility—are clear accelerants for long-term dominance. For investors willing to look past near-term volatility, AAON presents a compelling buy at current levels. Here’s why the thesis holds:

1. Data Center Growth Catalysts: Memphis Capacity Expansion and $174.5M Orders

AAON’s BASX division, which specializes in advanced data center cooling systems, is the company’s crown jewel. In Q1 2025, BASX bookings surged 83.9% year-over-year, contributing to a record $1.0 billion backlog. This figure—up 83.9% annually—reflects pent-up demand for air- and liquid-cooling solutions as hyperscalers and enterprises race to build energy-efficient data centers.

The $220 million Memphis facility, now nearing completion, will be a critical enabler of this growth. Once fully operational by late 2025, it will boost BASX’s production capacity by over 50%, directly addressing the supply chain bottlenecks that hampered Q1 margins.

2. Margin Pressures: A Temporary Setback, Not a Structural Issue

AAON’s Q1 2025 earnings miss stemmed from two key factors:
- R454B Refrigerant Shortages: Supply chain constraints at the Oklahoma segment reduced gross margins to 26.8% (down 8.4 percentage points YoY).
- Operational Deleveraging: Lower production volumes and elevated SG&A costs (due to tech investments) further pressured profitability.

However, management has already implemented fixes:
- Production Ramping: Tulsa operations are scaling up to offset Oklahoma’s slowdown.
- Cost Controls: SG&A as a percentage of sales is expected to decline in Q2/Q3 as revenue grows.

Crucially, gross margins improved sequentially (from 25.3% in Q4 2024 to 26.8% in Q1 2025), signaling stabilization. The backlog and Memphis expansion will drive further recovery.

3. Backlog Strength and BASX Dominance: Proof of Structural Demand

AAON’s $1.0 billion backlog is not just a number—it’s a forward-looking revenue guarantee. With 60% of the backlog tied to BASX’s data center solutions, the company is benefiting from secular trends:
- Global Data Center Spending: Expected to reach $280 billion by 2027 (Dell’Oro Group), driven by AI and cloud adoption.
- Regulatory Tailwinds: Energy efficiency mandates (e.g., EU Ecodesign Directive) favor AAON’s high-efficiency cooling systems.

Moreover, BASX’s 374.8% YoY sales growth (in Q1 2025) underscores its leadership in a niche market with limited direct competitors. This segment’s scalability ensures that even if macroeconomic headwinds persist, AAON’s data center exposure will drive outsized returns.

4. Valuation: Premium Priced for a Premium Opportunity

Critics argue AAON’s 43.5x P/E and 29.5x EV/EBITDA multiples are too rich for an industrial HVAC company. But this ignores two critical factors:

A. Peer Comparisons Favor AAON

• HVAC Peers: Lennox International trades at 21.8x P/E, while Daikin Industries (a global HVAC giant) trades at 23.5x.
• Tech Infrastructure Peers: Vertiv (VRTX) and CyberSwitching (CYBS) trade at 24x and 27x P/E, respectively—both well below AAON’s multiple.

AAON’s premium is justified because it combines industrial resilience with tech-driven growth. Its BASX segment mirrors the scalability of software companies, while its legacy HVAC business provides stable cash flows.

B. Long-Term Data Center Tailwinds

The Memphis facility alone is projected to generate $100 million+ in annualized revenue by 2026. With a 50% gross margin target for BASX, this could add ~$50 million to annual profits—a significant boost for a company with a current market cap of ~$1.3 billion.

Conclusion: Buy the Dip, Own the Trend

AAON’s Q1 miss is a speed bump on a superhighway of growth. The data center boom is real, and AAON is the only pure-play HVAC company with scale in this space. While near-term risks like refrigerant shortages and macroeconomic uncertainty linger, the backlog, Memphis expansion, and 25% dividend hike ($0.40 annualized) all signal confidence from management.

Investors should use dips—like the 5% post-earnings pullback—to accumulate shares. With a backlog-to-revenue ratio of 2.5x and a clear path to margin recovery, AAON is a buy for portfolios seeking exposure to the next wave of digital infrastructure.

Actionable Thesis: Buy AAON at current levels, with a 12–18 month price target of $120–$140, assuming margin normalization and Memphis ramp-up.

The data center revolution isn’t slowing—neither should AAON’s ascent.