Investment firm Kerrisdale Capital, best known for its high-profile short-selling campaigns, has shifted to a bullish stance on industrial automation company Regal Rexnord, arguing that Wall Street is significantly undervaluing a business that sits at the intersection of two of the fastest-growing technology themes: artificial intelligence data centers and humanoid robotics.

In a report published on June 30, the hedge fund disclosed a long position in Regal Rexnord, describing the company as one of the cheapest industrial stocks despite its growing exposure to AI infrastructure. The report marks a notable departure from Kerrisdale’s recent string of activist short bets and reinforces a broader investment trend that increasingly favors “pick-and-shovel” companies supplying the critical components underpinning the AI revolution.

Regal Rexnord shares have already gained 63% year-to-date, but Kerrisdale argues the rally has barely reflected the company’s long-term earnings potential.

“Get it while it’s cheap,” Kerrisdale wrote.

“Despite an impressive strategic and financial transformation and exposure to a wealth of popular secular growth drivers, Regal is one of the cheapest industrial stocks in the market today.”

AI Infrastructure Creates Hidden Growth Story

Unlike chipmakers such as Nvidia or memory suppliers including Micron, Samsung Electronics and SK Hynix, Regal Rexnord operates much deeper within the AI supply chain. The company manufactures precision motors, power transmission systems, gearing technologies, motion control equipment and industrial automation components that are essential for constructing AI data centers, warehouse automation systems and advanced robotics.

As hyperscalers, including Microsoft, Amazon, Alphabet and Meta, continue investing hundreds of billions of dollars in AI infrastructure, demand is expanding beyond semiconductors to encompass the broader ecosystem of industrial suppliers required to build, cool and operate next-generation computing facilities.

Kerrisdale says that this indirect exposure gives Regal an attractive position within the AI value chain without many of the risks associated with companies facing semiconductor shortages or commodity price volatility.

“A popular AI trade has been ‘pick-and-shovel’ companies building the tools and the infrastructure enabling the technology,” the investment firm said.

While sectors such as power equipment manufacturers and industrial metals producers remain exposed to supply-chain bottlenecks, Kerrisdale believes component manufacturers such as Regal are relatively insulated from those pressures.

Robotics Could Become An Even Bigger Catalyst

Although data centers feature prominently in Kerrisdale’s investment thesis, the hedge fund believes robotics could ultimately become the larger growth opportunity. The emergence of “physical AI”—the integration of artificial intelligence into industrial robots, warehouse automation, manufacturing systems and autonomous machines—is expected to become one of the next major investment themes after generative AI.

Kerrisdale said Regal is already well positioned to benefit.

“Physical AI, or the extension of artificial intelligence into the physical world, promises to revolutionize manufacturing and logistics,” the firm wrote.

“Regal has a broad portfolio of motors and linear motion products required for robotics, conveyor systems, and warehouse material handling that account for 21% of total revenue.”

As manufacturers increasingly automate factories and logistics companies deploy AI-powered warehouse systems, demand for the precision motors and motion technologies produced by Regal is expected to rise.

Valuation Gap Remains Unusually Wide

A central pillar of Kerrisdale’s bullish thesis is valuation. The investment firm noted that Regal currently trades at approximately 11.5 times expected 2027 EBITDA, significantly below industrial peers despite possessing comparable long-term growth prospects.

Specifically, Kerrisdale pointed to companies such as RBC Bearings and Parker-Hannifin, whose valuation premiums have widened even as Regal’s operational performance has improved.

“In a world where even a whiff of data center revenue in a company’s opportunity pipeline can drive material multiple expansion, Regal’s exclusion from the party stands out,” Kerrisdale said.

“Where’s the love?”

Using a sum-of-the-parts valuation that assigns higher multiples to faster-growing business segments, Kerrisdale estimates 81% upside for Regal’s shares.

The investment firm’s confidence is partly supported by the performance of earlier AI infrastructure investments.

In a post on X, Kerrisdale highlighted three previous recommendations tied to AI and data center expansion:

• ACMR: up 580%
• STX: up 830%
• AIXA: up 270%

The firm described Regal as its latest beneficiary of the rapidly expanding AI infrastructure build-out.

AI Spending Broadens Investment Opportunities

The report points to a broader shift in investor focus. Early enthusiasm around artificial intelligence centered primarily on chipmakers such as Nvidia and Advanced Micro Devices. More recently, investors have expanded their search to companies supplying the supporting infrastructure, including power equipment, electrical systems, cooling technologies, networking hardware, and industrial automation.

That trend has accelerated as global technology companies commit unprecedented levels of capital to AI. Major hyperscalers are expected to collectively spend hundreds of billions of dollars this year on AI infrastructure, while semiconductor manufacturers continue investing heavily in new fabrication facilities and advanced packaging capacity.

The expansion has created opportunities for companies supplying everything from electrical motors and industrial controls to conveyor systems and precision engineering products.

Unlike many AI-related companies whose valuations have surged following headline announcements, Regal Rexnord has largely remained below Wall Street’s radar.

Kerrisdale states that disconnect presents an opportunity for investors seeking exposure to the AI investment cycle through industrial companies with established cash flows, diversified operations and growing participation in both data center construction and robotics.

If spending on AI infrastructure continues at its current pace, the firm believes Regal’s role as a supplier of mission-critical industrial components could become increasingly recognized by the market, narrowing the valuation gap with its higher-rated peers.

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