GE Vernova- Morgan Stanley states the case for further upside

Morgan Stanley's note on GE Vernova (GEV) highlights the potential impact of the recent Constellation Energy Group (CEG) and Microsoft (MSFT) announcement on broader market trends and GEV's business prospects. The CEG/MSFT deal, which involves co-locating data centers with new high-quality baseload generation like gas-fired power plants, underscores the growing demand for reliable and stable energy sources as data centers expand. This trend is particularly relevant as hyperscalers seek to meet sustainability goals while ensuring the reliability of their operations. The report suggests that natural gas power plants, especially those capable of future decarbonization, could play a critical role in supporting this demand, positioning GEV favorably in the market.

GE Vernova is actively engaging with hyperscalers to potentially co-locate new gas plants at large data center sites, a strategy that could materialize into significant order volume by mid-2025. The anticipation is that Independent Power Producers (IPPs) would own these gas turbines, backed by long-term Power Purchase Agreements (PPAs) with hyperscaler customers. Even in scenarios where gas plants are built "behind-the-meter" to supply power directly to data centers, a grid connection would still be necessary to ensure backup and load-following capabilities. This setup suggests a significant premium that hyperscalers may be willing to pay for new baseload power sources, which is supportive of stronger pricing on GEV's gas turbine equipment.

Order trends for GEV are already showing strength, with 2024 projected to be the best year for gas-turbine orders since 2013. The report notes that these trends do not yet fully capture the incremental demand from data centers, particularly in North America, where order volumes are expected to increase significantly in the latter part of 2024 and into 2025. GEV, with approximately 70% market share in the US, is well-positioned to benefit from this growing demand for natural-gas-fired power plants.

Morgan Stanley reiterates its "Overweight" rating on GEV, with a price target of $256. The firm also updates its bull case, raising the target to $397, reflecting stronger margins in the Power and Electrification segments. The base case assumes 6% annual revenue growth through 2035, with significant margin expansion, while the bull case sees even higher growth and margin improvements. The updated bull case suggests consolidated EBITDA of $5.5 billion in 2026, a 13% increase from the previous bull case estimate and 20% higher than the current base case.

The valuation for GEV is supported by the company's strong position in the energy transition market, with growth drivers including increased global power demand, rising renewables development, and a focus on energy reliability. The report indicates that GEV's current stock price, up 22% since the recent management presentation, still has room to grow as the market fully appreciates these growth prospects.

In summary, Morgan Stanley's analysis suggests that GEV is poised to capitalize on the growing demand for reliable power sources in the data center market, supported by favorable order trends and strong positioning in the US market. The firm sees significant upside potential, with a clear line of sight to the bull case as the company continues to execute on its strategic initiatives.

Bull, Base, and Bear Case Highlights:

- Bull Case ($397):

- Higher top-line growth rates through 2035.

- Stronger margins in Power and Electrification segments.

- Consolidated EBITDA of $5.5 billion in 2026.

- Base Case ($256):

- 6% annual revenue growth through 2035.

- EBITDA margins expand from 5.5% in FY24 to 13.7% by 2035.

- Improving FCF conversion driving $1.9 billion of FCF in 2025.

- Bear Case ($148):

- Slower long-term revenue growth due to project and cost overruns.

- Margin pressure from offshore wind projects.

- Higher cost of capital reflecting operating challenges.