Investing.com -- Power generation has emerged as a critical bottleneck in data center development, with availability determining expansion capabilities across the digital infrastructure landscape. According to BofA Securities, the constraints in U.S. grid infrastructure are pushing data center operators toward off-grid power solutions to overcome capacity limitations and rising connection costs.
The shift toward off-grid power generation is accelerating as large customers face specific grid or generation costs for connection. Currently, gas accounts for approximately 50% of planned capacity increases for onsite power generation, followed by battery storage, solar, and nuclear options. This trend is particularly beneficial for companies specializing in gas turbines and gas engines for onsite prime power generation.
BofA Securities has identified two standout stocks in this sector:
1. GE Vernova
BofA Securities rates GEV as a "Buy" with a price objective of $725, based on a 26x EV/EBITDA multiple of their 2027 adjusted EBITDA estimate. This target represents a premium to the 13x peer average on 2026 estimates, which analysts believe is warranted given GEV’s above-peer earnings growth and margin trajectory. The company is positioned to benefit significantly from the growing demand for gas turbines in off-grid data center power generation. Key risks include potential changes to government wind turbine incentives, execution challenges on targeted $500 million cost reductions by 2028, secular decline in natural gas turbine demand, and potential cost overruns on services and equipment contracts.
In recent news, GE Vernova announced its first onshore wind repower upgrade agreement outside the United States with Taiwan Power Company. Additionally, analysts at firms including Jefferies, Mizuho, and TD Cowen have adjusted their price targets on the company, citing a mixed outlook and weaker wind orders.
2. Caterpillar
Also rated as a "Buy" by BofA Securities, CAT has a price objective of $650 based on 27x 2026 estimated EPS. This valuation exceeds the 15-year historical range of 15-18x, reflecting the company’s portfolio resiliency and structural growth drivers, particularly in power generation. While facing some headwinds that may slow growth, CAT benefits from unique macro and business cycle factors supporting stronger cycle-over-cycle earnings, including infrastructure development, construction spending shifts, higher miner free cash flow generation, aging fleets, and data center expansion. Potential downside risks include tariff policies, reduced capital spending among mining and energy customers, pricing pressures, dealer destocking, and dealer sales growth deterioration.
Caterpillar announced a strategic agreement with Vertiv to collaborate on advanced energy solutions for data centers. The company is also seeing strong demand, with Truist Securities noting a significant multiyear backlog for its power generation engines and a record total backlog providing substantial revenue visibility.
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