Shares of Power Solution International (PSIX +8.54%) plunged 27.7% on Tuesday as of 2:19 p.m. EDT.
Power Systems was down along with most AI and data center-related stocks, as fears over higher energy prices and interest rates triggered a broad market sell-off. However, Power Solutions also delivered its fourth-quarter earnings report last night.
While headline figures beat expectations, concerns over gross margins and a lack of guidance specifics sent Power Solution's stock falling. But is this AI-adjacent stock a buy on the dip?
NASDAQ: PSIX
Key Data Points
Revenue is booming, but gross margin falls
In the fourth quarter, Power Solutions delivered 32.5% revenue growth to $191.2 million, while adjusted (non-GAAP) earnings per share actually declined 31% to $0.71. Even though earnings per share were down a lot, this decline was mainly due to differences in the company's tax rate from the prior year. Whereas for much of last year Power Solutions received a tax benefit due to prior-year loss carryforwards, the company became a full taxpayer in late 2025, resulting in a decline in earnings.
Yet even outside the tax issue, Power Solutions' gross margins fell sharply in the quarter, from 29.9% in the year-ago quarter to 21.9% in the fourth quarter of 2025.
Management pointed to the company's deliberate transition away from legacy transportation and industrial segments to power systems serving the hypergrowth data center market. Management noted the decline in margins was attributed to "operating inefficiencies related to our accelerated production ramp-up for data center product lines."
In conjunction with earnings, Power Solutions also announced the acquisition of MTL Manufacturing & Equipment Inc. for an undisclosed sum. MTL makes switchgear subbases, electrical enclosures, and fuel tanks that will help Power Solutions deliver a more complete product set for the data center market.
While that could be a prudent acquisition, the added costs on top of operating inefficiencies apparently soured investors.
Image source: Getty Images.
The future is uncertain, but Power Solutions stock may now be a buy
On the press release, management also declined to give specific guidance, noting only that in 2026, it expects, "continued full year sales growth and moderate margin improvement from the products serving data center markets, offset by some headwinds from the oil and gas markets."
However, given that the AI data center build-out should continue to grow strongly this year, based on the capital spending guidance of all the big tech stocks, Power Solutions should continue to see growth. Analysts are projecting an average EPS of $4.46 in 2026, meaning the stock now trades at just 13.9 times this year's average EPS estimate.
That's much cheaper than most other AI-related industrial stocks, so Power Solutions may be a good way for small-cap value investors to play the AI revolution.
