"AI power trading" is booming, and equipment manufacturers are thriving

The urgent demand for artificial intelligence power from technology companies is reshaping the landscape of the power equipment market. Small turbine and fuel cell manufacturers have become unexpected winners in this supply competition, with their stock prices rising far more than traditional equipment giants.

According to media reports on Thursday, data centers are facing a severe power shortfall. Morgan Stanley estimates that by 2028, U.S. data centers will face a power shortage of 45 gigawatts, equivalent to the total power generation of Illinois. While large natural gas turbines are an ideal choice, the order wait times can stretch for years, and the construction cycle is lengthy. At least one listed developer, Fermi, has turned to purchasing second-hand turbines from General Electric.

This supply-demand imbalance is driving data centers to turn to off-grid solutions that are more expensive but have faster delivery times. Bloom Energy's stock has soared over 500% this year, and turbine and reciprocating engine manufacturers like Caterpillar and Rolls-Royce have also recorded significant gains. Although these small devices have a higher unit cost and emit more, their modular characteristics and rapid delivery capabilities give them a competitive edge in the current market environment.

Small Devices Fill Supply Gaps

Data centers are aggressively purchasing Bloom Energy's solid oxide fuel cells, which use natural gas as fuel. At the same time, small natural gas turbines and reciprocating engines produced by Caterpillar, Wartsila, Cummins, Rolls-Royce, and Generac are also gaining favor. These devices are typically used in mobile applications such as backup power or oilfield services.

Bloom Energy's stock trajectory is the most representative. The company's stock price remained flat until the end of 2024 but surged sharply after announcing agreements with American Electric Power, Brookfield Asset Management, and Equinix for data center projects. After last week's earnings call, its stock jumped 18% in a single day, and its forward price-to-earnings ratio has now reached about 140 times.

Caterpillar, known for its engineering equipment, is experiencing a surge in demand from data centers. Sales to power generation customers (primarily data centers) grew by 33% year-over-year in the third quarter. The company's turbines power xAI's data center in Memphis, Tennessee, and it has announced plans to supply data centers in Utah and Texas. Backup generator manufacturer Generac stated last week that it is seeing strong demand from hyperscale tech giants, but this positive news has largely been overshadowed by weak sales to residential customers.

Valuation Divergence Reveals Investment Opportunities

In contrast, turbine and reciprocating engine manufacturers appear to be a more reasonable entry point, although purchasing their stocks also means buying exposure to other business lines—Caterpillar's engineering construction business, Cummins' automotive manufacturer customers, or Rolls-Royce's aviation business Caterpillar, Rolls-Royce, and Cummins have all seen increases this year, but they are still significantly discounted compared to large turbine manufacturer GE Vernova, which has a forward P/E ratio of 47 times.

The power generation costs of these smaller devices are much higher than those of the large combined cycle natural gas turbines produced by GE Vernova, and they often emit more (excluding fuel cells). However, their modular characteristics make them cost-competitive when providing off-grid power to data centers that require nearly 100% uptime. When a data center uses a 500-megawatt turbine, it needs another turbine of equal size as a backup. In contrast, a data center using 100 5-megawatt turbines only needs to purchase a few additional small turbines as backups.

In modular solutions, the choice of technology becomes complex. According to research consulting firm Thunder Said Energy, the upfront costs and maintenance expenses of solid oxide fuel cells like Bloom Energy are higher, but they offer greater fuel efficiency and do not rely on combustion, resulting in less air pollution, which may give them an advantage in permitting.

Capacity Expansion and Market Sustainability Game

Given supply bottlenecks, data centers may be more focused on speed rather than cost details. Juan Macias, CEO of AlphaStruxure, which operates on-site energy systems for data centers, stated that customers are willing to pay a premium for electricity delivered in 2027 or 2028.

Demand is so strong that equipment manufacturers have to consider capacity expansion. Caterpillar stated last Wednesday that delivery times for some large turbines are being extended, and the company is "prepared to take action" to increase capacity if needed. Bloom Energy has announced plans to add 1 gigawatt of manufacturing capacity by December 2026, effectively doubling its existing capacity.

Large turbine manufacturers are being more cautious, having been hurt by overbuilding driven by the tech boom in the early 2000s. For example, GE Vernova stated in its latest earnings call that capital expenditures for its gas power and grid business may peak in 2026. Bulls may see this as an opportunity for small equipment manufacturers, but the restraint of large equipment manufacturers also reminds investors that a hot market does not always last