GE Vernova: Upgrading to Narrow Moat and Raising Fair Value Estimate, but Shares Look Pricey

Key Morningstar Metrics for GE Vernova

• Fair Value Estimate: $203.00
• Morningstar Rating: 2 stars
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: High

Last month, GE Vernova GEV announced it is expanding its capacity of heavy-duty gas turbines by 35% beginning in 2026 and expects its year-end 2024 electrification backlog to triple relative to year-end 2022. These positive updates were partially offset by additional near-term offshore wind costs.

Why it matters: The expanded manufacturing capacity of gas turbines signals confidence in a prolonged rebound in gas turbine orders in the years to come. Electrification backlog commentary points to continued red-hot demand for its fastest-growing segment. We are raising our medium-term margin expectations for the gas power and electrification segments. Our revised expectations include a 13% adjusted EBITDA margin in 2028, up from our previous assumption of 12%.

The bottom line: We are awarding the firm a narrow moat after raising our midcycle financial forecast multiple times since launching coverage in April. This upgrade is underpinned by the gas power business, which benefits from intangible assets and switching costs. Relative to solar panels or wind turbines, gas turbines offer a long tail of service opportunities following initial installation, supporting switching costs. We are raising our fair value estimate of the stock to $203 per share from $182, owing to our higher financial forecast and the moat upgrade. Despite our valuation increase, we view shares as overvalued following significant outperformance this year.

Coming up: The company announced an investor event on Dec. 10. We expect management to raise its long-term margin targets and provide further details on its capital allocation approach, given its growing cash balance ($5.8 billion as of June 30). We also expect an update on its offshore wind business. This includes a timeline for recognizing its $3 billion in unprofitable offshore wind backlog and the impact of events at Vineyard Wind, which was forced to pause construction following a faulty GE blade in July.