Shares of GE Vernova slide as investors focus on the wrong part of its business
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CNBC Finance
5 min read
GE Vernova shares dipped slightly on Wednesday after the power equipment company's fourth-quarter profits were reported below analyst expectations. But the weakness presents a buying opportunity. Revenue for the three months ending Dec. 31 increased about 4% year over year to $10.96 billion, topping expectations of $10.56 billion, according to LSEG. Orders increased 65% organically to $22.2 billion, driven by growth across all segments. As a reminder, analysts focus on orders to gauge demand rather than sales, which may reflect past order fulfillment. Adjusted earnings per share (EPS) more than doubled from last year to $2.78, missing the $2.96 estimate, LSEG data showed. Bottom line You never want to see profits miss the mark, but after we drilled down into the numbers, we discovered that the adjusted EPS and adjusted EBITDA misses were driven entirely by the company's troubled wind segment. This business became a problem child for GE Vernova after the U.S. government halted all offshore wind activity last December. But the unit is small and getting smaller each year, and we don't think the market should assign it any value. Instead, our focus is on the continued robust results from the power and electrification businesses, where demand is off the charts, and both revenue and adjusted EBITA beat the consensus estimate. Gas turbines are the best option to power data centers being built across the country, and electrification has become increasingly important as customers race to keep up with electricity demand and grid stability. In the power business, GE Vernova delivered a quarter in which revenue increased 5%, driven by gas and nuclear power, with segment EBITDA margins expanding to 16.9% from 14.9% last year. In the fourth quarter, the gas power equipment backlog and slot reservations increased sequentially from 62 gigawatts to 83 gigawatts, driven by strong demand in both the U.S. and internationally. Pricing for these heavy-duty gas turbines has become a hot topic for investors amid rising capacity across the industry. We are in a stock market that loves anything in a supply shortage because it translates to pricing power. The heavy-duty gas turbine market is in short supply, but there's some fear that Vernova will lose pricing power once more capacity comes online. CEO Scott Strazik poured cold water on this notion during the conference call, pointing out that pricing for their equipment continues to strengthen. These pricing gains are very positive as the company moves through its $94.4 billion backlog. GEV 1Y mountain GE Vernova 1-year return In the electrification segment, revenue increased 32% year over year on an organic basis, and segment EBITDA margins improved to 17.1% from 13% last year. The business's total backlog ended the year at $35 billion, up $4 billion sequentially and $11 billion year over year. On the earnings call, the company called out strong demand across the segment for grid and data center equipment, from both traditional companies and hyperscalers, a customer base that GE Vernova is strategically deepening its relationship with to gain market share inside data centers. For example, the company is currently testing a solid-state transformer that could become a new product line in 2027. To be sure, GE Vernova's quarter didn't beat on every line item, and we understand why a stock up 94% over the past year struggles to rally when it's not picture perfect. But if you look at the different components of the quarter, you'll see that the two areas the market should care about the most were actually much better than expected. Selling it on a miss in the wind segment is short-sighted, especially since the challenges there have been well known. Wind's struggles didn't prevent management from raising its revenue outlook for 2026 and 2028. The stock has been choppy all Wednesday, flipping between gains and losses. But with the power and electrification businesses firing on all cylinders, weakness today is an opportunity. We upgraded our rating back to 1 this morning and reiterate our $800 price target. New guidance GE Vernova now expects 2026 revenue of $44 billion to $45 billion. That's a $3 billion upgrade from the guidance given at December's investor day and above Street estimates of $42 billion. The improved revenue guidance was driven by a higher forecast for the electrification segment, which is expected to deliver revenue of $13.5 billion to $14 billion this year at a 17% to 19% segment EBITDA margin. Management reiterated its expectation that the power segment's organic revenue will grow 16% to 18% at a 16% to 18% segment EBITDA margin. The wind unit's organic revenue is expected to be down in the low double digits, with a $400 million EBITDA loss, a slight change from prior expectations of losses similar to 2025. The company also raised its 2026 free cash flow guidance to $5 billion to $5.5 billion, up from $4.5 billion to $5 billion. It continues to expect adjusted EBITDA margins of 11% to 13%. Looking out to 2028, the company now expects revenue of $56 billion, up $4 billion from the investor day outlook. That's slightly above the FactSet consensus estimate of $55 billion. GE Vernova also raised its cumulative free cash flow forecast to at least $24 billion, up from at least $22 billion. It reiterated its adjusted EBITDA margin of 20%. (Jim Cramer's Charitable Trust is long GEV. 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 discussed a stock on CNBC, 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.
