The Caterpillar Correction Shouldn't Last Much Longer
Key Points
Caterpillar addresses two key AI bottlenecks: power and construction.
The recent dip has resulted in a more attractive valuation.
Caterpillar has a $72 billion backlog -- almost double from a year ago.
Caterpillar (NYSE: CAT) has been outperforming the S&P 500 by riding artificial intellgience (AI) tailwinds, and a recent correction doesn't change that fact. While talks about a slowdown in AI development gripped headlines, they were largely for naught, with Meta Platforms CEO Mark Zuckerberg saying that market forces and competition are enough to keep AI models safe.
Hyperscalers are ramping up their AI development, and Caterpillar is at the center of it, since power is a critical bottleneck. That's the basic setup for why Caterpillar's correction won't last for long, but there are additional details that can fuel a rally.
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The AI build-out needs power and infrastructure
Caterpillar is gaining market share across multiple key industries vital to artificial intelligence. First, its power & energy segment increased by 17% year over year in the second quarter.
High demand from AI data centers has ignited this segment of the business to the point where Caterpillar is sitting on a $72 billion backlog. The backlog has almost doubled year over year and provides meaningful revenue visibility. It's also up by $9.4 billion sequentially, which represents a 15% boost.
Second, AI data centers still need to be built to accommodate the increased need for compute. As hyperscalers gobble up existing gigawatts for their long-term projects, it further restricts the supply of remaining compute. Its construction segment saw a 35% year-over-year revenue jump.
Most of the growth came from North America, which correlates with where most tech giants are setting up data centers. Construction revenue was up year over year in every region.
The valuation looks more compelling
Dips present good buying opportunities when a company's fundamentals improve or remain stable. In Caterpillar's case, the company has demonstrated deep involvement in the AI boom, with the backlog serving as a multi-year green flag.
The correction has brought Caterpillar down to a 1.4 PEG ratio. The stock has previously hovered above a 2 PEG ratio, and its other valuation metrics, including the P/E ratio, are much lower than they were a few months ago.
An investment in Caterpillar right now is a bet that the AI boom will continue. Grand View Research projects a 30.6% CAGR for the artificial intelligence industry through 2033. In the meantime, hyperscalers continue to commit vast sums to capital expenditures. Six of the major hyperscalers are projected to spend $1.3 trillion in 2027.
Caterpillar addresses power and construction, bottlenecks that will remain in place throughout the build-out. As tech leaders invest more capital and secure more resources, the remaining power and construction services will surge in value, potentially translating into sizable returns for long-term investors.
Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Caterpillar and Meta Platforms. The Motley Fool has a disclosure policy.