Post Views: 8
The AI industrial trade has regained its momentum following months of market volatility and fears of a slowdown in artificial intelligence spending. Our newest Club holding is outflanking its peers in the run higher. GE Vernova shares closed at an all-time high Tuesday for the sixth session in a row, a streak that has put the stock solidly above where it was in January before the AI trade was upended by Chinese startup DeepSeek. However, the same cannot be said for other data center-linked plays in Eaton , a fellow Club name, and Vertiv . Both stocks have rallies sharply alongside GE Vernova in recent weeks, but they have yet to return to pre-DeepSeek levels and set new record highs. The three stocks are among the best-known names linked to the AI data center buildout theme — a hot trade in recent years as investors looked for companies outside the tech industry that would benefit from AI spending. The thinking was simple: If many more power-hungry data centers needed to be built, stocks of industrial companies that sell products used within those facilities – such as Eaton and Vertiv – should be bought. The logic extended to shares of companies that would be essential to meeting the growing need for electricity to power those data centers. GE Vernova, as a maker of gas and wind turbines used to generate energy, fit that bill. Vertiv shares more than tripled in 2023 and then more than doubled in 2024. Eaton jumped 53% in 2023 and followed it up with a 38% advance last year. GE Vernova’s market value more than doubled in 2024, even though the stock only debuted in April of that year. But, in late January, Chinese startup DeepSeek burst onto the scene , and the whole narrative of more data centers and more power was thrown into question. With DeepSeek unveiling an AI model that it claimed was a cheaper, faster alternative to those created by American tech firms, investors panicked. They jumped to the conclusion that all these plans for new data centers were too ambitious and less power would be needed to run them in the future. The result was double-digit percentage declines in the share prices of GE Vernova, Eaton and Vertiv on Jan. 27, which was also a brutal day for the broader market as DeepSeek fears pummeled AI tech stocks including Club chipmakers Nvidia and Broadcom . While the most bearish conclusions drawn during that initial DeepSeek panic ultimately subsided in the weeks ahead, President Donald Trump’s aggressive tariff policy emerged as a significant headwind for the market, especially in corners of the market sensitive to economic growth. Investors worried that a potential recession could result in a cutback in AI spending, putting a cloud over the data center theme once again. By April 4, all three stocks traded even lower than where they closed on Jan. 27. The fog has lifted, though, enabling shares of GE Vernova, Eaton and Vertiv to rally hard since early April. A key moment was Trump moderating his “reciprocal” tariff policies on April 9, and more positive updates on trade tensions have emerged since then. Upbeat quarterly earnings results from tech giants such Meta Platforms and Microsoft in late April further reignited optimism in the AI trade because the companies showed no signs of moderating their capital expenditure plans. After all that, GE Vernova has now recovered all its share price losses since the DeepSeek-driven plunge – and then kept on going on its way to this six-day win streak. Eaton and Vertiv, on the other hand, remain 11% and 25%, below their closes on Jan. 24 — the session before the huge DeepSeek sell-off — respectively, as of Tuesday. For what it’s worth, Nvidia and Broadcom, whose chips are instrumental in the AI buildout, also were below their Jan. 24 levels through Tuesday. So, why has GE Vernova been able to race back to all-time highs while these two industrial AI peers haven’t? GEV ETN,VRT YTD mountain GE Vernova’s year-to-date stock performance compared with Eaton and Vertiv. One potential reason is that GE Vernova is much earlier in a potential upcycle for revenue and orders. From 2020 through 2024, cumulative revenue growth for Eaton’s segment that contains its U.S. data center business — known as Electrical Americas — totaled 60%, while Vertiv’s overall revenues grew 50%, according to Barclays analyst Julian Mitchell. Meanwhile, GE Vernova’s cumulative organic growth was approximately 8% over the period, according to Barclays, which factored in GE Vernova’s performance prior to its separation from the former General Electric conglomerate last year. “You’re much better off today buying Vernova because the company is coming off a much lower base and, in theory, there’s a lot more revenue upside left over the balance of this decade,” Mitchell told CNBC. GE Vernova also has a larger backlog, known as the value of customer orders that haven’t been fulfilled yet. This tells you how much business they have booked into the future, and could indicate better visibility into future revenue streams to investors amid the market uncertainty. “If we look at Vertiv and [Eaton’s Electrical Americas business], their backlogs are worth about nine months of revenue. If we look at GE Vernova, by contrast, their backlog is worth about three years of revenue,” said Mitchell, who has a buy rating on GE Vernova. He has an equal weight hold rating on Vertiv and Eaton. Company-specific announcements have played a role, too. GE Vernova shares surged earlier in May following the company’s $14.2 billion gas turbines and energy solutions deal with Saudi Arabia. The stock got another lift Friday after Trump signed an executive order that supported the U.S. nuclear power industry. GE Vernova has a nuclear business that includes smaller nuclear reactors. Bottom line It’s nice to see GE Vernova getting the recognition it deserves from investors, but this parabolic move higher has been surprising and required the Club to get a little more cautious in the near term. Accordingly, we downgraded the stock to a hold-equivalent 2 rating on Tuesday. However, that is not a reflection of a change of our long-term thesis in GE Vernova, which we initiated a position in on May 13 . Rather, we don’t want to chase the stock’s huge move higher. On Tuesday, we increased our price target on GE Vernova to $500 apiece from $460 following the recent momentum in its business. “I just can’t get into buying it,” Jim Cramer said during Tuesday’s Morning Meeting. “I didn’t expect it to go straight up right after we bought it.” As for Eaton, there’s no doubt the company is a beneficiary of the AI boom due to its data center business. But we believe the stock deserves some praise for more than just that – particularly its strong aerospace business. Still, we can’t ignore how closely Eaton’s stock performance correlates with the AI trade. In fact, Jim has been weighing whether to remove either Eaton or Dover from the portfolio, given that both companies also are industrial companies with AI exposure. (Jim Cramer’s Charitable Trust is long GEV, ETN, DOV, META, MSFT, AVGO and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
People walk through the hallways at Equinix Data Center in Ashburn, Virginia, on May 9, 2024.
Amanda Andrade-Rhoades | The Washington Post | Getty Images
The AI industrial trade has regained its momentum following months of market volatility and fears of a slowdown in artificial intelligence spending. Our newest Club holding is outflanking its peers in the run higher.
