The greatest bottleneck to the build-out of artificial intelligence (AI) infrastructure isn't chips; it's power, at least according to Elon Musk. Indeed, as if to prove the point, Musk's company, Space Exploration Technologies, recently bought APR Energy, a company that delivers power to data centers, utilities, and industrial companies, for $1 billion. The acquisition highlights that power demand exceeds supply, and that's great news for companies that benefit from increasing use of gas to power AI data centers.
GE Vernova benefits from investment in gas power
The principle of demand/supply dynamics shifting a company's prospects is perfectly encapsulated in GE Vernova (GEV +0.85%). A few years ago, when the company's operations were part of the former General Electric, there were real questions about the long-term growth rate potential of gas turbines (GE Vernova's key product) due to the rise of renewable energy. In addition, electrification infrastructure was also seen as a low-growth industry reliant on maintenance capital spending for the developed world's mature electricity network.
NYSE: GEV
Key Data Points
Fast-forward to 2026, and the surge in demand for power has fundamentally changed its business. The chart of its backlog, or remaining performance obligations (RPO), shows growth in recent years, indicating strong end demand, and management believes its RPO will reach $200 billion in 2027.
However, that's only part of the story, as demand is so strong that GE Vernova can sign Slot Reservation Agreements (SRAs), under which customers pay cash upfront to secure production slots for gas turbine equipment in the future. On the company's recent earnings call, CEO Scott Strazik disclosed that the power backlog grew from "44 to 53 gigawatts and SRAs increased from 56 to 63 gigawatts" in the second quarter. He expects to have "at least 125 gigawatts under contract by the end of the year," with SRAs converting into orders and driving growth in backlog/RPO.
Data source: GE Vernova presentations. Chart by author.
However, rising sales of gas turbine equipment aren't the only driver of the company's earnings. In fact, within the power segment, the real money generator is the higher-margin services revenue that comes from Long Term Service Agreements (LTSAs) attached to turbine equipment sales. Consequently, every increase in its installed base of gas turbine equipment leads to long-term earnings and cash flow.
GE Vernova's electrification business
In addition, the company's electrification business (grid solutions, power conversion, and storage) is seeing "robust demand" from both traditional utility customers and AI data centers desperate for power. It's a significant earnings generator for the company, and according to Yahoo! Finance, Wall Street analysts are modeling 17% earnings growth this year and 30% growth in 2027.
|
Segment |
First-Half Revenue |
First-Half EBITDA |
Backlog as of June 30 |
|---|---|---|---|
|
Power |
$10.4 billion |
$1.8 billion |
$111.6 billion |
|
Electrification |
$6.6 billion |
$1.2 billion |
$44.6 billion |
|
Wind |
$3.5 billion |
($657 million) |
$20.4 billion |
Data source: GE Vernova presentations. Table by the author.
There's good reason to believe wind can be profitable in the future, given that GE Vernova's onshore wind business tends to be profitable, and the company continues to work through loss-making offshore wind contracts.
Image source: The White House.
Is GE Vernova a stock to buy?
Trading at 32 times estimated 2026 earnings, GE Vernova is not a superficially cheap stock, and buying it probably requires faith in the need for power to support the AI infrastructure build-out and beyond. That said, it's a bet that Musk is willing to take, so investors are in good company buying into the investment theme. As long as orders and backlog keep growing, so will GE Vernova's installed base, which means higher profit expectations over the long term.
