GE Vernova, a recently launched company spun off from the renowned General Electric, has already seen its stock price nearly double since its debut in March. This $70 billion industrial giant, specializing in parts, maintenance, and technology for electricity generation facilities, has attracted significant attention from Wall Street analysts, many of whom believe there’s even more room for growth. But what exactly does GE Vernova do, and is it truly a compelling investment?
GE Vernova is a leader in its field, providing solutions for various types of power plants, including gas, nuclear, hydroelectric, steam, and wind. It boasts an impressive installed base, claiming to generate 30% of the world’s electricity. This installed base includes gas and wind turbines, and the company divides its revenue almost equally between its products and services. Currently, 42% of GE Vernova’s revenue comes from gas products and services, 24% from wind, and 22% from its electrification segment. Nuclear contributes a smaller 3% of revenue.
The Power segment, which includes gas, hydro, nuclear, and steam, represents the majority of GE Vernova’s profits, with a strong EBITDA margin of 13.8%. While the Wind segment is currently in the red, with an EBITDA margin of -5.7%, it has seen a significant improvement from last year. The Electrification segment boasts an EBITDA margin of 7.2%.
Despite GE Vernova’s reliance on gas power solutions for its current profitability, the company is witnessing improvement in margins across all its segments. However, the Wind segment experienced a substantial revenue drop of 21% last quarter compared to the previous year.
One key factor driving GE Vernova’s growth is its impressive remaining performance obligations (RPOs). These represent revenues the company has already contracted but hasn’t delivered on yet. Currently, RPOs total a substantial $116 billion, which is roughly 14 times the company’s revenue last quarter. This substantial backlog showcases a robust demand for GE Vernova’s solutions. Notably, 64% of these RPOs are for services, which tend to have higher margins than product sales.
Wall Street analysts are generally optimistic about GE Vernova’s future, with price targets consistently moving upwards. In September alone, the company received at least 10 price target upgrades. Bank of America recently raised its price target by 50%, reaching $300, while Guggenheim initiated coverage with a $300 price target. Jefferies also boosted its target to $293. These optimistic projections suggest that GE Vernova’s stock price could potentially increase by 17% from its Sept. 24 level of $256. However, it’s crucial to note that the average of all analysts’ targets suggests a potential downside of 11%. It’s vital to consider both viewpoints when assessing GE Vernova’s potential value.
While the demand for GE Vernova’s products is undeniable, there are some concerns about the company’s future trajectory. It plays a role in powering the AI and data center revolution, but this isn’t its primary focus. Companies seeking fully renewable energy often turn towards nuclear power, which currently doesn’t represent a significant portion of GE Vernova’s business. GE Vernova’s plans to decarbonize its gas turbines by using hydrogen as fuel remain uncertain, as the economics of this approach are still unclear. The company itself acknowledges that policy changes, incentives, infrastructure development, and significant initial investments are necessary for hydrogen to become a competitive and viable option.
Furthermore, the company is scaling back its wind business due to ongoing losses. Despite these challenges, GE Vernova’s position in the expanding global demand for electricity, particularly in its electrification segment, suggests that it has potential for success. The company’s reliance on fossil fuels and its ambitions in the hydrogen market, however, present hurdles that need to be addressed for GE Vernova to fully achieve its growth potential.
