GE Vernova LLC

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

GE Vernova is a global energy company, providing equipment, solutions, and services for power generation, transmission, and electrification.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

GE Vernova is a newly formed company which was spun off from General Electric, thus, it has limited publicly available historical financial data. It is important to keep this in mind while analyzing the company.

Business Overview

GE Vernova operates in the global energy sector, with a focus on the transition to a more sustainable and reliable energy future. The company is structured around three main segments:

  • Power: This segment focuses on technologies for power generation, including gas, steam, and nuclear power plants. This also includes plant services, upgrades, and maintenance.
  • Wind: This segment provides wind turbines, onshore and offshore, and related services.
  • Electrification: This segment is responsible for enabling electric distribution and transmission through a range of technologies including software, grid automation, and high-voltage equipment.

A significant aspect of their operations is related to helping customers transition to renewable and clean energy solutions.

  • Energy Transition: The global movement towards renewable energy sources is a major trend impacting the entire industry. Companies like GEV are working towards innovating in this new ecosystem, by providing hybrid technology solutions, with gas power plants equipped to work with hydrogen and other zero carbon fuels.
  • Government Regulation: In response to climate change, regulations regarding electricity generation are becoming more stringent, with increased attention paid to carbon emissions.
  • Demand for Power: Global demand for reliable electricity continues to rise. Especially in the fast-developing countries.
  • Decentralization: The rise of microgrids and distributed generation is transforming the traditional utilities model. This poses both a challenge and an opportunity for the existing players.
  • Supply Chain Resiliency: The COVID-19 pandemic, ongoing wars, and trade conflicts have exposed and continues to expose fragility in global supply chains which is affecting the energy industry significantly.

GE Vernova faces a complex competitive landscape, it competes with companies that include industry giants in energy and manufacturing.

  • In the Power segment, major competitors include Siemens Energy, Mitsubishi Power, Ansaldo Energia, and Doosan Enerbility, among others.
  • In Wind, major competitors include Vestas Wind Systems, Siemens Gamesa, and Goldwind Science and Technology.
  • In Electrification, it competes with ABB, Siemens, Schneider Electric, Eaton, and others.

GE Vernova differentiates itself through its strong global presence, wide portfolio of technologies, its large existing installed base, its ability to develop and integrate digital tools, and its focus on sustainability and decarbonization.

Financial Analysis

Due to the recent spin-off, a complete and in-depth financial analysis is challenging. However, a brief look on the most recent data gives clues to the strengths and weaknesses of the company.

  • Revenues: GE Vernova’s revenue distribution is heavily skewed towards the Power and Electrification segments.
  • Power: $6.8 billion in 2023 revenue, $6.9 billion in 2022.
  • Wind: $4.4 billion in 2023, $4.7 billion in 2022.
  • Electrification: $6.8 billion in 2023, $5.9 billion in 2022. The results reflect the growing importance of electrification solutions in their business.
  • Margins: Their operating margins are somewhat inconsistent between different segments.
  • Power segment: operating margin of 3.3% in 2023.
  • Wind: operating loss of $1.1 billion in 2023
  • Electrification: operating profit margin of 8.1% in 2023. The adjusted segment profit margins show similar trends. The Wind segment is still struggling to reach profitability.
  • Cash Flow: GE Vernova’s operating cash flow is volatile which is expected for companies in this business sector. Net income has also shown high volatility from Q2 2023 to Q1 2024, with net losses in Q3 and Q4 2023 and Q1 2024. However, revenues have been growing consistently.
  • Debt: The company had a debt balance of over $6 billion as of 12/31/2023. This is substantial and has to be taken seriously, but it also has a good amount of assets which reduces debt concerns significantly. It also shows that the company isn’t afraid of financing its business with debt which might help growth.
  • Guidance: As per the last earnings call in April 2024, GE Vernova is raising its revenue and Adjusted EBITDA projections for 2024 with expected revenue growth of 5–7% which is consistent with their view of long-term growth. They anticipate the second half to be stronger than the first half of 2024, with higher profitability, and better results in the following years.

While revenue shows growth, consistent profitability is a major focus for the company and a big challenge to investors.

Moat Assessment: 2/5

Based on the analysis, we assign a Moat rating of 2 out of 5 for GE Vernova with the following justification.

  • Intangible Assets (brands, patents, and regulatory licenses): GE Vernova has a strong brand name and it has patented technologies and licenses, but it is not enough to give it a solid moat by themselves because those patents are prone to competitive threats and may become outdated quickly. Also, regulatory requirements for energy are constantly evolving, this makes regulatory licenses also unreliable. The power segment, does have many contracts, and these contracts are sticky due to long relationships.
  • Switching Costs: Switching costs are limited because the customer is not too dependent on a specific provider. There may be switching costs for maintenance contracts in the Power segment.
  • Network Economics: GE Vernova doesn’t have any meaningful positive network effects.
  • Cost Advantage: The company doesn’t have an apparent cost advantage. They do use low cost labor markets, but the costs are not unique to the company. They do benefit from having large economies of scale due to a vast installed base. But because of the way new technologies are displacing existing older technology, this may be not too reliable.

The company’s moat strength is varied between segments. The Power segment has narrow moats due to large contracts, while Electrification has a wider moat because of switching costs from high integration with its customers. Wind has relatively no moat.

Risks to the Moat and Business Resilience

  • Technological Disruption: The energy sector is subject to a rapid pace of innovation which could hurt existing infrastructure.
  • Competitive Pressures: The industries in which GE Vernova operates are highly competitive, with established players and new entrants.
  • Regulatory Uncertainty: Changes in regulations concerning power generation and distribution can have substantial impacts on profitability.
  • Supply Chain Disruptions: The global supply chain is susceptible to disruptions from various sources, these can greatly impact their ability to execute projects.
  • Capital Intensity: The business is extremely capital intensive due to massive projects, high capital expenditures, and need for investment in future technologies. Also, because of the long life cycle of energy projects, the invested capital takes too much time to create a reasonable return on investment.

Despite these risks, the sheer size and the historical presence of the company does give it a reasonable amount of resilience. The company is also taking steps to ensure it has a relevant stake in the new, growing markets for clean and renewable energy and other future-tech energy.

Understandability Rating: 4 / 5

We rate GEV an understandability score of 4, as while the businesses themselves are not too complicated for an experienced investor to grasp, the specific financials and technological details of the company may need thorough analysis and research. Also, it is a newly formed company, hence, more information is needed to establish a more complete understanding of the company’s situation.

Balance Sheet Health: 3 / 5

We rate the balance sheet health of GEV to a 3 out of 5. It is not in a poor condition but nor is it excellent. The company has decent amount of assets, and a big network, but it’s long term debt is high and it has yet to show consistent profitability, especially in the Wind business sector. Cash flows of the company are volatile.

Conclusion

GE Vernova is operating in a very important business sector, which will see tremendous growth in the coming decades. The spin-off from GE is also beneficial to its growth. However, the company still has some significant problems such as low profitability, and high debt that needs to be taken seriously. These things will negatively affect the stock. However, for investors willing to take the risk, this company might have interesting upsides.