Also one small risk.*
From Al Root at Barron's, December 22:
GE Vernova had a wild week after new AI fears sent investors into a very brief tizzy.
Recent share price volatility tells investors something important about the stock and what’s driving it.
GE Vernova makes utility-scale power generation equipment. It’s become the go-to stock for investors looking to capitalize on the growing demand for electricity, driven mainly by power-hungry AI data centers.
U.S. electricity demand grew roughly 1% a year for the past 20 years. Wall Street expects growth to be closer to 3% annually for the coming 20 years.
That theme, along with strong business execution by Vernova, left shares up 100% coming into Monday trading. Shares doubled despite a 10.5% drop this past Wednesday, catalyzed by fears that startup Mythic might succeed in making AI chips that require less power. Shares recovered, however, and GE Vernova stock ended last week with a loss of just 2.3%.
All those stock moves leave GE Vernova valued at about 33 times earnings before interest, taxes, depreciation, and amortization, or Ebitda, expected over the coming 12 months.
The average industrial company in the S&P 500 trades for closer to 17 times.
GE Vernova gets the big valuation because Ebitda is expected to grow significantly. The company is expected to generate Ebitda of $3.4 billion in 2025, rising to about $11 billion by 2028. Jefferies analyst Julien Dumoulin-Smith expects it will grow to more than $18 billion by 2035.
That’s Ebitda growth of almost 20% a year for a decade. Making adjustments for cash generation and assuming stable valuation multiples, Dumoulin-Smith’s numbers imply double-digit gains for GE Vernova stock for a decade.
That’s great. That’s the risk, too. It’s tough to value things on 2035 numbers. A lot could happen between now and then. There isn’t much for investors to do other than be aware of the problem. GE Vernova stock simply implies a lot of growth for many years....
But in the big utility scale turbines they are sold out through 2028, with the backlog stretching into the early 2030's.
There are good reasons not to invest in plant, property and equipment to raise capacity, including the fact the industry has been burnt twice in the last 25 years and the fact the typical American potential employee does not have the skills required to build these rather amazing machines.
Both of those issues can be addressed but doing so will take time and money.
GEV is up a little this morning, +$1.49 (+0.22%) at $ 668.01.
