Bird's Eye View of GE Vernova

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3:14Sign up for your one-day-per-month trial today at shopify.com slash beginners. Go to shopify.com slash beginners. That's shopify.com slash beginners. During the call, the CEO mentioned a lot, two gigawatts, two gigawatts, two gigawatts, And I think that's what I wasn't able to verify this, but from what I can infer, they were he was referring to the contracts that they were signing that the hyperscalers were requesting that they needed two gigawatts of sustained power. And so to put that in perspective, like we're throwing our numbers, you know, what does that mean? Two gigawatts. That doesn't sound like that much.

3:55I love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything. You're tuned in to the Investing for Beginners podcast. Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now. All right, folks. Welcome to Investing for Beginners podcast. Today, we're going to do a bird's eye view. And the company that we're going to pick for today is GE Verona. uh this is uh the ticker is gev but before we dive in today we'd love to hear from you so we are running a listener survey and everyone who participates gets entered into a raffle for a 500 amazon gift card plus the first 100 people to respond will receive a free investing for beginners coffee cup and coaster set so head over to einvestingforbeginners.com slash pod survey that also will be in the show notes.

4:56Your feedback will help make the show a lot better and we'd appreciate you taking a few minutes to share your thoughts. Again, that's einvestingforbeginners.com slash podsurvey. Must be 18 or older to fill out the survey and terms and conditions will apply. All right, so with that, let's talk about a bird's eye view of GE Verona. So Andrew is going to act as the interviewer and I'm going to attempt to be the expert on this company today. Well, you've done, what is it? A thousand X or a million X or infinity more work than I've done on this company. So I will happily sit on the seat and you sit on that seat.

5:37All right. Might be a little bit better for listeners. So, all right. GE Vernova. I'm sure a lot of us have heard about GE, maybe haven't heard that second part. So who are they and what do they do? How do they make money? Stuff like that. Yeah. Yeah. So GE Vernova is a spinoff from General Electric or GE. So the company was spun off in 2021 and it became a public company at that time. The company GE actually split into three different parts. So now there's a GE Healthcare, GE Vernova, who we're going to talk about today, and GE Aerospace. So General Electric was one of the blue chip stocks for many, many, many years and had fallen on hard times, had started to recover, and they decided to split off the different segments.

6:28So now GE Vernova is a kind of a separate standalone company. So their company mission, according to the CEO yesterday, I listened to their latest investor presentation, which was done in December. So their company mission, air quote, is the energy to change the world. So that all sounds fantastic and a little bit woo-woo. But what does that really mean so g vernova is they're a global energy equipment manufacturer who are building products and services kind of across the entire electric value chain and so they basically help people generate electricity transmit power across grids store the electricity and they're also helping modernize the aging infrastructure so those are that's that's kind of the basic gist of what they do.

7:19They operate in three segments. So we'll talk about these a little bit more. But the main thing that they do is they help generate power for the AI data centers. They're also helping modernize the grid. So our electrical grid is probably outdo, overdue for some updating is a massive understatement. A lot of the transmission lines and transformers and everything that we're using currently today are probably 30 or 40 years past when they need to be updated. So this is long overdue. And then they are also helping transfer the power. And we'll talk about all those as we kind of go along. So maybe we could talk about the business segments first.

8:08Yeah, I was curious. So you said three segments, which one catches your eye first and why did it catch your eye? And then what is it and all that? Yeah, so they operate in three segments. So they have the electrification segment, they have the wind segment, and then they have the power segment. So we'll just kind of walk through all these. The one that gets the most press is the power segment. This is the one that is producing, is connected the closest to AI. And this is the one that has the gas turbines that they're making, the nuclear power, the small modular reactors, and also the long-term contracts that they're working out with the government.

8:47That's the one that gets the most press. The one that I'm actually the most excited about is the electrification segment. And this is one that's growing the fastest. So this is about 25 % of the revenue, give or take. And it's also growing the fastest. It's got about 25 % organic revenue growth in 2025. The other segments are growing a little bit slower. So what the electrification segment does is this is the grid solutions part of it. So they're building out transformer, switchgear, and other power conversion equipment. And they're helping automate and, I guess, digitalize the grid. And this is the part that is most overdue and probably has the longest runway for them right now.

9:30because as the CEO said yesterday in the call that I listened to, this is going to be the longest running part of their business because there is so much growth available. And there's not a lot of companies out there that can do this on the scale that GE Vranova can do. And so that gives them a definite leg up. For those unfamiliar with our grid segment, if you will, is it's very fragmented to say the least. And there's lots of little different islands. So I think there's three main segments of infrastructure here in the United States. But among those three, there's a lot of different players that are all contributing to different parts of the segment.

10:17So utilities, for example. So like I live in North Carolina, so I pay Duke Energy every month. Duke Energy is responsible for updating and maintaining the lines and the transformers and all the equipment that they operate on. But there's also an overarching grid that all connects to. And so what GE Vernova is doing is they are working with Duke Energy to help them update this stuff. So Duke Energy doesn't actually do it. They contract out to companies like GE Vernova and NextEra Energy and others to help them update these systems. And so that's what GE Vernova is the most excited about. And that's what they're working on the most.

10:57So you're going to hear this a lot. If you listen to any calls with GE Vernova, a lot of the discussion is around their backlog. And we'll get to that here in a power one in just a minute. But the equipment backlog for the electrification right now is it grew 6.5 billion for the year. And right now it's sitting at$26 billion for equipment backlog. And so what that means is that GE Vernova has$26 billion in projected revenue from once they execute the contracts that they have signed that could generate revenue for this company. And these contracts are long dated. So these aren't things that they're completing next week.

11:40They can take years to fulfill. And so this is where the company has the longest runways, what the CEO was telling me. So that's probably the one that I'm most excited about. This is the air quote, star performer of the business. Again, the company is growing revenues right now about 7 % or 9 % overall. But this segment is growing around 25%. It's about a quarter of the revenues right now for the company. Yeah, that's super helpful context, but incredible backlog. So as a former investor in defense stocks, I remember book to bill is kind of a metric where you can compare revenues to backlog. Book to bill, I think they were saying like if it's over a one, then that means you have an exciting backlog and you're probably going to get some really nice growth.

12:33What were the numbers again? It was 26 backlog. 26 billion in backlog just for that particular segment alone. And they're doing revenues of like a 10th of them. That's right. They're hovering around between eight to 9 billion annually right now. Okay. That's insane. So it's like, yeah. I mean, I don't have the formula in front of me, but book to bill, I would imagine over to 2.5. Yeah. That's crazy. Okay. Yeah. So, so like needless to say, like if you are interested in, in GE Vernova, you should get your background about the grid and how it, how it works in the United States. So on that, I will say back in 2022, we had Adrian come on our show and he did a bird's eye view of Brookfield Asset Management.

13:22And so if you're looking for more information after we're done here, go to Investing for Beginners podcast, Brookfield. That episode should show up and you'll get more background on the electric grid and more information about that. It's always better. so okay you mentioned the backlog for equipment where does that rabbit trail lead you next the next i guess was looking at the power segment that was the the other thing that i was was kind of most curious about because this is the part that gets the most press if you go on social media if you uh look at the you know what the company i guess pumps up the most It's the connection to AI.

14:07And so what's happening is that a lot of these hyperscalers and data centers need power. There's a huge, huge demand for power for the needs of these data centers. And so what's happening is that a company like GE Vernova, they can produce fairly quickly these gas turbines that can provide these data centers and hyperscalers with consistent, stable power. One of the drawbacks to renewables is that they are not consistent. The sun doesn't shine, the wind doesn't blow. It just makes it harder. They also have a much smaller footprint. So to put a gas turbine is a much smaller footprint than building out a solar farm that you need to power the data centers.

15:01And so I don't have the numbers for the data centers. I wasn't able to get those for the power that they need. but one of the things that i did learn was each of these gas turbines can produce anywhere from 400 to 600 megawatts of power sustained power depending on the size of the unit and how how quickly the gas turbines turn and so depending on what the needs are for each individual data center for example will have a bearing on how many gas turbines they need to install or the hyperscalers for that matter the same. So just to kind of put all this in context, there was during the call, the CEO mentioned a lot, two gigawatts, two gigawatts, two gigawatts.

15:49And I think that's what, I wasn't able to verify this, but from what I can infer, he was referring to the contracts that they were signing, that the hyperscalers were requesting, that they needed two gigawatts of sustained power. And so to put that in perspective, we're throwing our numbers, you're like, oh, what does that mean? Two gigawatts, that doesn't sound like that much. To put it in perspective, the CEO mentioned this little tidbit. The city of New Orleans uses their peak average usage of power daily is two gigawatts a day. So the city of New Orleans uses a steady state, two gigawatts of power a day.

16:28And this is what these hyperscalers are looking to use to power their data centers. And that's what they're trying to build out. GE Vernova is trying to build out for these companies. So to put that in perspective, New York City, I believe, is running around 15 gigawatts of power daily. That is what their sustained is. So GE Vernova right now has a backlog of gas turbines to be built of 80 gigawatts. So think about that. That's 40 cities of new orleans they have a backlog of to build these gas turbines so it's huge whatnot is quickly becoming the next big thing for you to pay attention to and its success isn't even slowing down over time but it's compounding faster and faster more and more people on this platform are making millions of dollars and this goes from anyone small or large solo sellers or large businesses we're all familiar with the old way of selling things you list things one by one and you hope that the right person stumbles into the right product at the right time.

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20:00That's a lot of cities to conquer, if you will, of like, this story could just be getting started. yes yes very very much so and that that is exactly the the story that the ceo was telling was that this is this is just starting uh the company is right now they're booked to they're at full capacity to build out the the gas turbines to 2028 and they are they are still booking contracts for beyond and they're also building out capacity to try to be able to produce more of these gas turbines. So when we're talking about these gas turbines, just to kind of make this a little more tangible for people, they're basically jet engines.

20:44It's really what they are. They're jet engines. So they have turbines that turn really fast and then they inject the, so it puts out an exhaust as the turbines put out. And then they inject natural gas into that exhaust which ignites which causes uh steam to be produced and that's what turns the turbines and creates the electric energy for these machines so they're basically building gas and you know they're basically building jet engines i read something on twitter a few days ago where one of the um one of the engineers was saying yeah we basically build jet engines that's that's cool um do you know like is it similar to hvac systems um more investors in hvac distributor and i know with those like they're getting a little bit better every year obviously if you've ever owned a home you have to replace your hvac every however many years but like big thing is like for hvacs as they get more efficient over the years that price goes higher And so it's like a very long-term revenue stream.

21:55Do you know if that's the case or is that something we can dive into at a future point? We could. They alluded to some of that. One of the things that they mentioned several times in the earnings calls and things that I listened to yesterday was that they are seeing a volume increase. So the request for more engines, but they're also seeing a, because there's so much demand, they're also seeing a pricing increasing in the units that they're using. Now, they did mention a couple of units that they have in Europe, in France, that are much older units that are far less efficient than the machines that they are building right now.

22:39So those older machines, he said, are probably producing energy around a 40 % efficiency output rate, whereas the new machines are putting out around 60 % efficiency, give or take. Wow. And they're constantly working on trying to improve that. The other part of this that I haven't mentioned is the small modular reactions or I'm sorry, reactors. So nuclear reactors. They're also building out SMRs. And this is another request from the hyperscalers and the data centers in the ability to try to get sustained power. And these are they are building these out as well. They have a unit that's being worked on right now in Canada, and then they have a few other ones that they're doing site selection and things like that.

23:31This takes a lot longer because of the regulations that surround building anything nuclear. It just takes longer. But this is another part of that power segment that they talked a little bit about as well. So this is something that's going to be growing part of their business as well. Okay, cool. anything else you think we need to cover about why people are excited that's that's a pretty like promising future i would say yeah right yeah it really is you know one thing i probably should mention just briefly that's a little bit of maybe you know not a downer but is not a positive for the business is the wind turbines so they are the leading producer of wind turbines in the united States and maybe even globally.

24:16And that segment of the business has been on the struggle bus. Revenues have been pretty slow. It hasn't been as profitable as they expected. And they also mentioned that orders for the turbines have been much, much slower, particularly for land usage. Offshore has been steadier for them, but onshore wind farms or wind towers have been much, much slower the the orders for those some of that is just because of the nature of the the requirements to build them the land that's needed to build them and just the the inefficiency of of using the towers so that hasn't been a great part of their business so there's something to you know so it's it's not all sunshine and roses i guess yeah very rarely is right right do you think some of that's affected by some of the government funding towards renewables oh yeah unquestionably yeah unquestionably they they mentioned you know that they are working closely with the government on like the gas turbines the smrs and the the grid electrification so they didn't really mention the government purse so much with the wind turbines but you got to think that it's certainly connected yeah makes sense makes sense all right uh let's get to my favorite part of an episode like this, give me some numbers.

25:39Let's go. Okay. All right. All right. Let's go. All right. So if we kind of take a look at the income statement, so a couple of things that are probably jump out. Number one is everybody's super excited about a business, but if you look at the revenue growth, it's good, but it's not hyperscaler. It's not these super growthy growth companies. They're growing around 5 % or 6 % a year. The last 12 months, according to Fiscal.ai, it's 9.4%. Last year in 2024, it was 5.1%. 2023, 12.1%. So these are not huge numbers by any stretch of the imagination. I mean, it's producing a lot of revenue. Just to put it in context, it's$37.6 billion in revenue in the last 12 months, which is on par with what Visa does annually.

26:36So just to kind of put it in perspective, it's doing good numbers. The company is profitable on a gross profit margin and on an operating margin level as well as net income, so across the board. And they are moving towards being more profitable. They have an initiative that they call Lean, L-E-A-N, which basically means they're trying to be more efficient with their operating costs. They are trying to cut general administration and trying to work on making their R &D more efficient and things of that nature. I will mention that the company moved from a negative operating margin when it went public in 2021 to now a positive operating margin of 3.7%, which is great.

27:23here's where it gets a little aggressive. Their target for 2028 is 20 % operating margins. So they want to go in two years from 3.7 to 20 % operating margins. So they talked a lot about 2028 targets during the call. And I think that kind of centers around the gas turbine backlog and whatnot. But yeah, they want to go from 3.7 % to 20 % operating margins in basically two years. So I thought that was, I was a little surprised by that. That feels really aggressive to me. Yeah, it does. And did they mention if it's a gross margin thing or if it's an operating leverage thing or just all the above? Like whether we expect?

28:11Yeah, kind of all the above. I think the majority of what they're expecting the expansion to come from is pricing. As the backlog gets bigger and bigger and more and more people are ordering more and more turbines, they're going to be able to charge more. And the more efficient that they get at their... They talked a little bit about robotics. They talked a little bit about AI helping to try to make them more efficient in their production. And so if they can start squeezing the juice a little bit more, they feel like that's where they can get the margin increase, as well as trying to be a little more efficient on the operation side of it.

28:55I will throw one more thing out there because I got to imagine there's at least one person out there who's going to go down deep rabbit holes because of this episode, and I hope you do. to the idea of pricing power and affecting gross margins. Look for our episode called Financials Demystified Gross Margins. You can search Investing for Beginners podcast on Google, pricing power margins, gross margins, something along those lines and it should pop up. That can give you a sense of if GE does, if GE Vernova does expand it through pricing like it sounds like they are implying, that's how it could really, in my opinion.

29:42Yeah, so you see in software companies, you get operating leverage from R &D or SG &A. But if they really want to hit that kind of a jump that you've talked about, which is what, like over 10x, something like that? I don't have the TTM numbers in front of me, but that has to be so much gross margin. I don't see, that would be so crazy if it was on the operating side. So I just want to throw that out there. Yeah, that's a very, very good point. I want to touch on capital allocation real quick. One of the things that they talked about, their goal is to return 30 % of cash to shareholders annually, either through a dividend, which they have been growing, and buybacks, so reducing their share count.

30:27So they've been authorized to spend up to$10 billion in share repurchases. And so that is going to be going forward one of their capital allocation metrics that they're going to be tracking. And they said that they want to be challenged on that. So that is something to kind of keep in mind. If we kind of switch over to the balance sheet quickly, one of the things that stands out really quickly is they have no debt. So they have net cash of about$8 billion on the balance sheet and they have no debt. So that gives them a lot of financial strength. They are an investment grade rated company. So if you go to Moody's or S &P Global, you'll find that they are an investment grade, which means that if they do want to take on debt and to do any acquisitions or things of that nature, they will be able to get pretty favorable terms as far as the debt that they'll be able to raise.