Keeping AI Cool: AAON Rides the AI Heatwave to Record Growth

Key Points

• AAON reported strong third-quarter earnings, beating revenue and EPS estimates and raising full-year 2026 sales growth guidance to 72% to 75%.
• The company's BASX data center cooling brand drove results, with revenue surging 218% year over year amid rising demand for liquid and air thermal systems.
• AAON disclosed a material weakness in internal controls over BASX revenue recognition, prompting restated first- and second-quarter results despite no evidence of fraud.

Developing artificial intelligence requires immense computing power, but the physical constraints of housing these processors are driving a parallel investment cycle in commercial infrastructure. While semiconductor manufacturers navigate supply chain bottlenecks and export regulations, physical data centers face a more immediate challenge: managing the intense heat generated by high-density servers.

This dynamic channels significant capital spending toward specialized thermal management suppliers. AAON, Inc. NASDAQ: AAON recently highlighted this trend, shaking off post-election data center regulatory concerns with a strong third-quarter earnings report.

The industrial manufacturer raised its full-year 2026 sales growth guidance, driven by rising demand for data center cooling. For investors looking for durable AI infrastructure exposure without direct exposure to the semiconductor manufacturing cycle, the specialized thermal HVAC space may warrant a closer look.

Chill Factor: Hyperscale Cooling Powers a Guidance Lift

AAON, Inc. gained nearly 25% across the two trading sessions after the company reported both earnings and revenue beats in its Q3 report.

Net sales rose about 84% year over year to $707.43 million, surpassing the $601.19 million analyst estimate, and diluted earnings per share more than doubled to 83 cents, comfortably ahead of the 57-cent analyst consensus estimate.

The strong quarter prompted management to raise its full-year sales growth guidance from a prior range of 55% to 60% to a new target of 72% to 75%, implying full-year revenue near $2.5 billion.

The market reaction reflects the growing importance of adequate facility cooling as AI hardware deployment accelerates. Next-generation graphics processing units generate substantial heat, and increasing power density within server racks is straining legacy data center cooling infrastructure.

Facility operators are actively retrofitting legacy air systems and building new liquid-cooled environments to keep compute clusters online and functioning efficiently. AAON, Inc. is capturing this specific capital expenditure cycle through custom-engineered thermal equipment, translating broader technological shifts into tangible industrial revenue.

By engaging directly with hyperscale operators, the manufacturer builds relationships around complex, custom-engineered projects that can provide improved revenue visibility in the coming quarters.

BASX Cooling Sales Surge as AAON's Core HVAC Business Grows

AAON's primary growth engine is its BASX brand, which specializes in data center thermal solutions. BASX-branded revenue rose about 218% year over year to $397.2 million, now representing more than 56% of total company sales. Within the AAON Coil Products segment, bespoke liquid cooling equipment climbed roughly 255% to $165.5 million, bringing trailing 12-month liquid cooling sales to about $450 million.

Earlier in the year, data center cooling stocks sold off after NVIDIA CEO Jensen Huang said the company's next-generation Rubin systems could operate without water chillers, raising concerns about future demand for traditional cooling equipment.

However, simultaneous growth in bespoke liquid cooling and custom airside thermal systems at AAON, Inc., alongside record commercial bookings at peers like Trane Technologies plc NYSE: TT, suggests rising rack power density is expanding total facility thermal requirements across both liquid and air formats.

Traditional commercial HVAC operations also demonstrated notable resilience. AAON-branded commercial HVAC sales grew nearly 20% to $310.2 million, supported by national account orders that grew about 70%. AAON, Inc. appears to be taking market share in an otherwise sluggish commercial construction environment.

A separate concern emerged following the U.S. midterm elections, when some data center infrastructure and cooling stocks sold off amid uncertainty over potential state-level regulations and who would bear the cost of power-grid upgrades. The selling affected peers like Vertiv Holdings Co. NYSE: VRT. AAON's management addressed this macro headwind directly on its third-quarter earnings call, noting that less than one-third of its roughly $1.85 billion backlog sits in states experiencing regulatory friction. The backlog consists of permitted projects rather than speculative builds, with over 80% contracted to well-capitalized hyperscale customers.

Turning a Profit: Operational Leverage in AI Cooling

Revenue growth is only part of the equation; converting those sales into sustainable cash flow is where business strength becomes apparent. AAON, Inc. improved its consolidated gross margin by 233 basis points sequentially to 26.7%.

The Coil Products segment saw margins recover from 19.1% to 25.8% on the back of backlog repricing and factory throughput gains. Selling, general, and administrative expenses as a percentage of revenue fell 400 basis points YOY to 12.5% of sales, highlighting healthy operating leverage as the top line expanded.

Adjusted EBITDA of $127.2 million beat consensus estimates by roughly 37%. This sequential margin expansion and return to positive free cash flow are particularly notable given the costs of expanding manufacturing capacity.

For instance, Modine Manufacturing Company NYSE: MOD recently experienced capacity-ramp margin compression and negative free cash flow during the first half of its fiscal year 2027 despite reporting strong data center sales growth. Scaling physical manufacturing often drains cash early on, making positive free cash flow a notable milestone for an industrial firm expanding this rapidly.

AAON, Inc. is managing its physical footprint expansion thoughtfully. The Memphis manufacturing facility is currently operating at only about one-third utilization. Management sees the potential for annual BASX production capacity to exceed $2 billion as existing facilities continue ramping, although it does not expect to reach that level by the end of 2027.

As production scales into this existing footprint, overhead absorption should naturally support continued margin stability. Net leverage sits at a comfortable 1.0x, allowing the enterprise to maintain a 10-cent quarterly dividend and retain a $70 million share repurchase authorization to utilize opportunistically.

Staying Cool Under Pressure

While the operational metrics are solid, investors should carefully evaluate a recent governance development.

During the third-quarter close, the finance leadership team identified material weakness in internal controls over BASX project revenue recognition, alongside separate accounting errors involving software subscriptions. AAON, Inc. filed amended reports to restate its first- and second-quarter results.

AAON said it found no evidence of fraud or misconduct. The restatement increased first-half 2026 net sales by $10.7 million and diluted earnings per share by nine cents. The economics of the underlying contracts remain unchanged.

Remediating manual accounting controls and managing working capital continue to be key execution tests for management over the coming quarters.

AAON reported a modest 5.9% sequential dip in total backlog, largely due to faster factory deliveries and a slight reduction in production days scheduled for the fourth-quarter holidays. Backlog nevertheless remained 40.5% higher year-over-year (YOY).

Looking ahead, the valuation sits at roughly 22x forward earnings against projected 2027 earnings growth of about 50%. AAON's stock has attracted elevated short interest, with a days-to-cover ratio just over six. This is noticeably higher than HVAC peers like Carrier Global Corporation NYSE: CARR and Lennox International Inc. NYSE: LII, providing the potential for continued short-covering support if execution remains steady.

Upcoming catalysts include a planned reporting change in the fourth quarter of 2026, where AAON, Inc. will split its financials into standalone AAON and BASX segments.

This move is expected to provide clearer visibility into specific data center thermal margins.

While analysts at Baird and Oppenheimer recently trimmed their price targets slightly to reflect peer multiple compression and the accounting restatement, both maintained Outperform ratings.

With a Moderate Buy consensus rating and an average price target around $106, the stock presents a practical, fundamental avenue for investors looking to position capital alongside the ongoing buildout of physical computing infrastructure.