It’s always surprising when a long-standing stock in a traditional industry soars in price. Several years ago, few investors or analysts would have expected that heavy machinery and vehicle specialist Caterpillar (NYSE: CAT) would be such a title. Yet over the past year, the company’s shares have nearly tripled in price, rising far more steeply than the S&P 500 index’s 25%.
Talk about a sleeper stock! Let’s spend a few moments discussing what’s made “the Cat” so popular with the market.
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AI advancement
The main secret to Caterpillar’s recent success can be summarized in two words: artificial intelligence (AI). Despite its rather dowdy public reputation (among those who know the company at all), Caterpillar is at the forefront of the revolution, bringing today’s heavily in-demand technology to our computer screens and mobile devices.
This is because one of Caterpillar’s main business units is its power and energy division. Within this, its reciprocating engines and the generator sets (gensets) that accompany them are go-to solutions for advanced data centers housing AI infrastructure.
AI is resource-heavy, and one of those resources is power. Not only does a facility stuffed with AI hardware require great amounts of this, but it also has to be supplied constantly and without interruption. Caterpillar’s power solutions were originally designed as backup options, but their high reliability and strong reputation have made them primary choices for many clients.
Caterpillar can make quite a bundle on such provisioning. It tends to sell the engines and the gensets as packages, complete with comprehensive service agreements that cover items such as diagnostics and maintenance.
AI data centers are crucial to the technology, so the entities that run them have a vested interest in securing such services for long terms. So the service agreements typically provide years of the predictable revenue that so many buy-and-hold investors love.
It’s hardly unusual for Caterpillar to be in the news when a massive AI data center project is announced. Just days ago, Microsoft and oil giant Chevron signed a deal to partner in a huge facility in Texas; no prizes for guessing which company, along with fellow industrial GE Vernova, will provide the power infrastructure for it.
