Shares of power generation technology provider GE Vernova are a good example of the AI malaise settling over the market for financial reasons, such as peak AI spending by the hyperscalers, and social reasons, such as growing concerns about AI producing bad outcomes for humanity.
Wall Street rarely addresses the latter, but it often tackles the former. And an overemphasis on new spending has left GE Vernova stock at attractive levels, according to Jefferies analyst Julien Dumoulin-Smith.
Addressing "peak order myopia" in a Friday report, he pointed out that new building isn't all that drives GE Vernova's business.
GE Vernova's business is currently booming, with AI companies eager to secure power for their computers now and through the end of the decade. In the second quarter, equipment orders doubled year over year.
That's great, but investors will worry about everything. And fears that things were about as good as they can get hit the stock. Coming into Friday trading, Vernova shares were down more than 23% from a 52-week high of almost $1,196 reached near the end of June. Its drop corresponded with the fall in semiconductor stocks, another signal that investors are worried that AI spending has gone too far, too fast.
Peak spending might be a concern.
What GE Vernova stock doesn't reflect, however, is "peak services," says Dumoulin-Smith. Valuing GE Vernova based on 2029 and 2030 numbers missed the services opportunity. The company's service business will be half the size then that it will be in 2040.
"GE Vernova's earnings are inherently less sensitive to data center deployment fluctuations than competing portfolios exposed to inventory cycles such as low-voltage electrical equipment, energy management, and cooling," he says.
He rates shares Buy and raised his price target to $1,185 from $1,155. That values GE Vernova stock at about 45 times estimated earnings expected over the coming 12 months. Shares of electrical equipment providers Eaton and Schneider Electric are valued at closer to 30 times earnings, based on analysts' average price targets.
Dumoulin-Smith thinks the premium is warranted based on services. Large power-generating turbines need to be maintained and upgraded over time.
His peers appear to agree. Overall, 78% of analysts covering the company rate shares Buy, according to FactSet. The average Buy-rating ratio for S&P 500 stocks typically ranges from 55% to 60%. The average analyst price target for GE Vernova stock is about $1,240, higher than Dumoulin-Smith's.
The positive call might be helping. GE Vernova shares were up 3.1% in midday trading at $952.94, while the S&P 500 was up 1.1%.