Caterpillar (NYSE: CAT ) is a famous industrial company known for yellow construction equipment. But as artificial intelligence (AI) spreads rapidly, you need to think broadly about caterpillars. Here’s how this industrial giant is adapting and evolving to support the AI revolution.
Caterpillar is historically known for manufacturing construction equipment, such as backhoes and dump trucks. An industrial company’s giant earth-moving machinery is used to build the world around us, from roads to buildings. Business is somewhat cyclical, as construction ebbs and flows with economic activity. However, some positive, big-picture trends are taking shape.
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For example, companies increasingly increase productivity. This means that new buildings and factories are needed. And artificial intelligence has led to a data center construction boom among companies trying to establish themselves as AI technology leaders. If there is a lot of construction going on, there is likely to be a greater need for the earth moving machines that Caterpillar is best known for.
In addition to earth moving equipment, Caterpillar also manufactures power equipment. It produces engines that can provide power in remote locations or act as a backup when the power supply goes down. One of the most important industries for Caterpillar’s power products is energy. Extraction of oil and natural gas, the latter fuel essential for the proper functioning of electric power grids, will be the material market for years to come.
But don’t stop with oil and gas producers. The utility industry will need to spend more to keep up with increasing electricity demand. Between 2023 and 2030, worldwide electricity demand is expected to increase by 43%. Demand from data centers is expected to rise by 200%.
The need for network investment will be another key support for Caterpillar’s business. And Caterpillar’s ability to provide dedicated power options before grid access can help support rapid data center construction in particular. At the same time, the ability to provide backup power can help keep data centers up and running during a blackout.
When you step back and look at the big picture, AI is a huge opportunity for Caterpillar, beyond its historical construction focus. However, investors are right to ignore the opportunity, noting that the stock’s price-to-sales and price-to-earnings ratios are well above their five-year averages. Still, Caterpillar probably deserves a similar spot on your AI wish list, given the significant bearish trend among cyclical stocks.
