GE’s Super-Vernova. Plus, Disney and A.I. Moviemaking

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I just want folks to understand what makes Vernova special is that there are only 3 companies in the world doing what they do., right? It's a rational industry. We have power growth in this country for the first time in a decade, and the company is laser-focused on execution. It's a very good combination.

Hello and welcome to the Barron's StreetWise Podcast. I'm Jack Howe, and the voice you just heard is Andrew Obin. He's an industrials analyst with BofA Securities, and he's talking about GE Vernova. Today we're going to answer all your Vernova questions like what's a Vernova and why is it up more than 400% since it hit the stock market last year. I'll also say a few words about my plans to take over Hollywood. Listening in is our audio producer Alexis. Hi Alexis. Hey Jack. How's my timber? Can I get a timber check? I'm a little, I get a little bit of a tickle, a little bit of a— Yeah, you sound a little stuffy. What's going on? It's just a little, uh, little pre-Christmas, uh, sniffles in my snorfler. So, uh, it's all right. I'll be okay. We have not talked yet. I'm sure we will at some point about Netflix's deal to buy Warner, the studio and streaming business. For now, I'll just say it's a little weird because Netflix is the company that spent so many years beating Hollywood into submission. Now it's buying part of what it's beaten. Also, the deal isn't cheap. Netflix can certainly afford it, but the price reminds me of when Disney bought those entertainment assets from Fox back in 2019. Bob Iger had done in the past these bite-sized deals for Marvel and Lucasfilm and Pixar, and those have paid off wonderfully well. Now he did this enormous deal for show business assets to put into Disney's streaming business, and Disney stock has gone basically nowhere since that deal. I wouldn't say that's a cause and effect. I'm just saying it raises eyebrows when another big streamer, Netflix, is paying a similarly humongous price for storied studio assets. Also, I don't know if the historical record is great on companies trying to buy Warner and make money. There was the time AT&T tried it and the time AOL tried it, and those are regarded as epic flops. I don't think this will be an epic flop for Netflix, but I do think the deal will cause more trouble for Netflix's competitors than it will produce an obvious payoff right away for Netflix. Paramount has a competing hostile bid, so I'm sure there will be more opportunity to talk about this deal. Now, very quickly to Disney and OpenAI. Alexis, did you see this news? Disney take a $1 billion stake in You get to make AI videos with its characters.

Yeah.

Which is wild to me. Have you ever done a text-to-video AI thing online? You ever turned just a phrase into a video? I have not. Have you? I haven't done it yet, but I've seen examples of people doing it. See, I had this great plan and the plan was to make a sequel to Avengers: Endgame. I was going to call it End of Your Game because those Avengers movies made a ton of money. The only problems are I don't own the intellectual property and I don't have Hollywood connections or talent, creativity, experience, or initiative. I'm willing to put roughly zero work or money into this project. And so it hasn't really gotten off the ground. But here Disney announces this licensing deal with part of OpenAI called Sora. That's the text-to-video tool. If you have an idea with just a clickety-clack of your keyboard, you can turn it into a video. I would swear it's magic, but people tell me it's artificial intelligence. As part of this deal, Disney will take a $1 billion stake in OpenAI. It'll receive warrants for more potential upside. It says it will eventually curate user videos to show on its streaming service. Here's Raymond James on the deal. We believe it allows Disney to play offense while investors, consumers, and creators ponder the impact of AI on more traditional media forms. That's me, creator. The problem is that pursuing a dream with no work is not as easy as it sounds. The first challenge was that I didn't have even a basic story idea. But in a stroke of visionary, not so much genius, but I would say passivity, I turned for a story idea to who? Sora's cousin, ChatGPT.

Right. That's, that's where you go when you want answers, but they'll work. Right.

But then I hit my next problem because ChatGPT doesn't seem to know yet about Sora's Disney deal. So it gave me a little plot, but there was no Iron Man or no Hulk. There were only these cheesy knockoff heroes. The names were AeroSpark, Flux, Titaness, and Ember Wraith. And I don't think I can put butts in seats with those. Even if I could, Sora limits its videos for non-paying users to 15 seconds and for paying users to 25 seconds. With runtimes like those, my viewers would have to be faster than flux to get through even a medium popcorn. So I'm in development hell for now, but I figure if Coppola could fight for a decade to make Apocalypse Now, I can stand by End of Your Game for at least another half hour. Okay, I want to get to my conversation with Andrew at B of A on Vernova. Let me first give some quick background for listeners who aren't familiar with this company. General Electric is outperforming. That's a phrase people haven't heard much since the 1990s, and not just because there's no longer a General Electric. The company split into 3 pieces, and investors who held all of the pieces are beating everything in sight. And I don't think it has gone according to plan. There are some clues to that that I'll share in a moment. If you're not familiar with General Electric, in the later part of the century before the century before this one, there was a banker who was pretty rich, but really he had more influence than personal wealth. His name was J.P. Morgan, and he had a client who had more inventions than profits. His name was Thomas Edison. And Mr. Morgan forced Mr. Edison to merge his electric company with this lighting outfit in Schenectady, New York, that had more commercial momentum than star power. And what followed was just over a century of parlaying profits into new business lines. Washing machines, turbines for jet engines and power plants, medical imaging machines. And there were some weird ones near the end, like show business and subprime mortgages. And what followed that was about a quarter century of getting rid of most of those businesses Starting with the weird ones. Even with that streamlining, shareholders who had stuck with GE for 20 years as of November 8th, 2021, so just over 4 years ago, those shareholders had lost 38% over those 20 years while the S&P 500 had made 524%. Now I picked that date because the following day the company announced that it would split into 3. And investors who had bought GE stock then and held each of the spinoffs, they've made more than 600%. They beat the S&P 500 and Bitcoin and NVIDIA. So why has the split-off worked so well? It's not GE Healthcare. That's one of the pieces. At the time of the split announcement, there was a company slide deck that went out to Wall Street analysts. It pointed to GE Healthcare as having the fastest growth potential of the three pieces. But it has actually produced the slowest growth, and profit margins are lower than predicted. It's been hit by trade tensions with China, and hospitals have been cautious on big-ticket purchases like those imaging machines. They've been watching for changes to Medicare reimbursements. So since GE Healthcare was first spun off in early 2023, it has returned 42%. It's about half as much as the S&P 500. Next was a spinoff of the energy businesses in April 2024. That was turned into something called GE Vernova, which I'll come back to. What was left of GE were the prized jet engine and related businesses, and these were named GE Aerospace, and they kept the ticker symbol GE. The others are GEV for GE Vernova and GEHC for the healthcare one. Okay, so for the aerospace business, sales growth and profit margins have been even better than promised. Global air traffic is healthy and growing. There's a multi-year backlog for jumbo jet orders, which means there's a multi-year backlog for engines. And analysts say U.S. airlines look poised for a prosperous 2026. I don't believe a word of that, which historically has been a pretty good indication that it could actually happen. Now GE Vernova. 4 years ago, I would have called this the ugliest child of a family that was not exactly known for its looks. And there were clues that management had modest expectations. When it put out sales growth projections for the 3 businesses, this one got the lowest growth rate. The company described its gas turbine business, which was thinly profitable at the time, as quote, stabilizing. It seemed to want to draw more attention to wind power. Initially, GE referred to this business as Renewable Energy and Power, and when it unveiled the name Vernova in 2022, the explanation went on like a juice bar enthusiast with a little too much to say about antioxidants. It called the name, quote, a combination of "ver," derived from "verde" and verdant, to signal the greens and blues of Earth, and "nova," from the Latin "novus" or new, reflecting a new and innovative era of lower carbon energy that GE Vernova will help deliver. It's delivering something, and that something is gas turbines. As many as it can make, the bigger the better, for as much as it can charge, which turns out to be plenty. And the things are sold out nearly through the end of the decade. And part of it is that natural gas turbines are used to turn natural gas into electricity, and this massive growth in AI and data centers needs a lot of power. But a bigger part of it, as Andrew will explain, is this broader trend toward electrification. What do I mean by electrification? I'll give you an example. I have mentioned this in the past in this podcast. In my home, the heat used to come from two giant oil tanks in the basement. I would explain how it worked, but it never really stopped working, so I never paid attention. And then I got lured by these big fat sweet tax credits to hire a company to replace my oil stuff with electric heat pumps and these fluid loops that run deep underground. Now my basement looks a little bit like the Starship Enterprise, but I don't have an oil bill anymore. What I do have is an electric bill that looks a little bit like a mortgage payment. It's just this kind of progress, progress, that Vernova, I think, is riding. But that's enough from me. The guy you want to hear from on Vernova is Andrew at B of A. We'll get to him right after this quick break.

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Get the facts at meta.me/risk. Welcome back. We're talking about GE Vernova. This past week, the company issued blowout guidance and the stock jumped 16% in a day. I probably should have mentioned that sooner. In my business, we call that burying the lead, and it's one of my specialties. To learn more, I reached out to Andrew Oben at BofA, who calls the company Super Vernova. Let's hear part of that conversation now. Andrew, I know that everyone wants to talk with the gas turbine guy these days, so I appreciate you making a few minutes to speak with me. It's been a great year. It's been a great run for GE Vernova and the latest results there. They're sort of ramping up forecasts and investors seem plenty pleased here. Just the, the high-level take on this. What is it that's driving this business so well right now? What I keep hearing from people is it's AI, it's all the data centers. They need power for these data centers. And so people need gas turbines to provide that power. Is that part of it? Is that all of it? How would you characterize it?

It's part of it. GE will tell you that right now out of their backlog, only 10% is related to data centers. If they look at their funnel, they think it's over 30%. In fact, we have a proprietary forecast where we're sort of thinking about electricity demand in the US over the next decade. So we actually think that the missing piece that investors are not paying attention to is the fact that electrification, and this is no more boiler, you have an electrical heater in your building now. All this policy was put in place under George Bush and it's coming to fruition right now. And we actually estimate that electrification of the US economy and specifically buildings, residential and non-residential, is the single largest driver of electricity demand growth in the US. And data center, the way you should think about it, it's the straw that broke the camel's back. So for a decade, US electricity demand has grown only at half a percentage point. We think that going forward it's going to be closer to 3 percentage points. And out of that increase, we calculate full percentage point is electrification and 80 bps is data center. Now, data centers today represent 5% of total demand and they will represent, you know, 35-40% of incremental growth. So it's clearly very significant as a source of growth, but it's not the largest source of growth. What's really happening is after a decade of stagnation, U.S. electricity demand is growing again.

I think I might be part of this because in my home we used to have oil heat and I replaced it with something with the heat pumps. They call it geothermal and there were big tax breaks to do it. So, so now I have no more oil bill, but I have a bigger electricity bill. And so that's part that for residences and office buildings around the country, that is the biggest growth driver here for Vernova.

That's what we are estimating. And in fact, at this point, what's driving the headlines are very robust turbine orders. But if you look at actually what's driving the earnings, it's their power business. And within the power business, it's actually services. It's servicing the existing fleet as utilization rate is going up. And also they have an electrification business. A lot of it is tied to the grid and it's continuing growth in grid spending.

Think back, uh, what was it, 4 years ago, I was looking at when they announced this, um, the split up of the business and these 3 parts. And I was looking at how they were characterizing the 3 parts and they listed the growth rates and they said this one can grow at mid to high single digit, uh, their revenue. This one is mid single digit. It seemed to me like Vranova was, I don't want to say the one they were least excited about, but they said this is going to be low single digit growth. We've recently stabilized the turbine business. They were talking in these kinds of terms. What do you remember about that moment, about the outlook for this part of the business versus the others?

Exactly right. The pushback from investors was that this business will never earn more than 10% EBITDA. So that's what people were thinking they were going to earn in '28, 2 years ago. The guide that they gave yesterday is for 20% margin for '28. So effectively, the reason the stock is going up because the perception of earnings power of this company is going up very, very rapidly. And as I said, what's happening, it's really the fact that the underlying power demand in the US has turned. And obviously AI is very, very important driving marginal demand. But our view that even without that, right, and appreciate that of AI, half of it, not AI data centers, only half of it is AI., right? The rest of it is just regular cloud data centers that were growing all along. But A, it's the marginal demand, and B, it's also grid growing very fast. And, you know, this use is really driving utilization of turbines. And where GE today makes real money, it's servicing these turbines. If you remember, GE got in trouble about a decade ago, right? The profitability in this business really collapsed. Why? Because utilization rate of gas turbines in the field was below expectations. So what's really been happening over the past 2 years, the service business has been coming back much faster than people have expected, and it's very, very high margin business.

It looks like in hindsight that this split up of the business has been a spectacular success for GE investors, for the, for people who held that regular GE share, you know, 4 years ago when the announcement was made, but it also looks like it hasn't been successful in quite the same way that management expected, right? How would you characterize, as somebody who watched GE for so long, how would you describe how it's gone so far?

Yeah, so, and I no longer cover GE Aerospace, nor do I cover GE Healthcare, so, but in case of GE Aero, what really happened, and this is what we've said, I think when GE Aerospace was buried inside GE Corporate, I think aerospace investors just never got to see the business up close and they never understood the quality of the underlying business. So I think that one is fairly simple. It's just the market did not understand the business. I would say in case of Givernova, the cycle really helped, right? People were not counting on the cycle happening. The view was that you should be treating this business with the same multiple as internal combustion engine. This was the business that was just going to die and replaced with renewable. And then US demand for electricity came roaring back and effectively due to power density, you have to use natural gas to meet the demand. Intermittent renewable capacity, just not enough. There's not enough of it.. It's not up enough and there are not enough transmission distribution lines to get it to the customers.

So we're back to gas power. I was reading your latest report on Vernova. It said that they were producing these heavy-duty gas turbines, about 55 of them a year, and there's a goal in place now to get to 70 or 80 by next year. But now there's a new goal actually, and management is saying No, no, we want 90 to 100 by 2028. And it's, you know, a company this large and this much money and so few of something that's going to leave people curious. Can you satisfy, for the sake of somebody who's never seen one of these things, you've seen them up close, what kind of impression do they make? What do they look like? What can one of these things do? And if I wanted to buy one, how much would I have to pay and how many years would I have to wait?

So right now you would have to wait, probably they're sold out through 2029 effectively. So you would have to wait, I guess, what, 3 years to get one? You would have to pay hundreds of millions of dollars. And there is a big question mark how they cost. It's actually a big debate what you have to pay because prices have been going up rapidly. And one would be the size of a large house. So these are big, big pieces of equipment.

They're gorgeous. And if you had a, I guess, a massive data center, would one of these power a data center of that size or multiple data centers? Or, you know, give us a sense of the scale of the power output.

Effectively, GE's H-Frame turbine will generate between 350 and 570 megawatts in combined cycle, and that's enough power for a large data center. So from that perspective, that One would power a data center, but it's just not how you necessarily use it. Utility would buy it for baseload power generation, and then the data centers really love being connected to the grid. So I think you would really would prefer to get your power from the grid. Then they have smaller turbines. You could sort of line a couple of these up to power data center as data centers are waiting to be connected to the grid. So there are many, many ways to sort of slice and dice it.

Got it. And how durable for an investor looking at this stock now? You're still bullish on these shares. They've done well. You know, when we hear about a company being sold out for years to come, obviously that's a great sign. What do you think about the next 5 or 10 years? What's the trajectory here? And by the way, Part of this business is the renewable business, right? You know, it seems like wind power is like barely part of the conversation anymore. Is that now forgotten? Is that a thing of the past? We're going to tell young kids one day, hey, there was once a time when we tried to make power from the wind. I mean, what's happening with wind power?

So I think what's happened with the wind power, it's actually very interesting because the U.S. infrastructure is evolving. And over the next year or several years, we are going to have more batteries and more T&D capacity. T&D, transmission and delivery. Yeah, lines, power lines, power lines and batteries. And, you know, the other thing that's happening is that the cost of gas is going up rapidly. So all of a sudden we don't like the wind because we have current administration. We have the president who is not a big fan of the wind, particularly offshore wind. But what's really interesting on a relative cost basis in the next couple of years, wind could come back as an attractive option And what's really interesting is that as battery storage becomes more economically viable and as the cost for that keeps going down to accommodate solar, right, to accommodate the grid complexity, we definitely think there is room for wind down the line.

But right now there is a bit of a pause. As far as the long-term potential for Vernova or what keeps you bullish here, if I, if I ask you to describe for us What do you still like about the stock? I mean, it has to be more expensive now after this kind of run. So what is this? Is this a growth company or is there upside underappreciated?

What's the appeal still of this stock? I would say, don't forget the stock is up 100% year to date or a little bit more because the Street estimates are up 100% in a year. So the market is being incredibly rational about the stock performance. It's not cheap, but we think they continue material upward earning revisions. And just to give you a sense, EBITDA growth in '25 is 56%, and these are our numbers, 45% in '26, and another 30% in '28 with room for possible earnings revisions. So just appreciate it's still a very, very fast-growing company as it's ramping up. I'll give you an example. So their electrification business, which today represents, we calculate next year is going to represent 40% of the company's earnings. 2.5 years, this business was breakeven. And effectively what we're doing is that we are ramping up very rapidly to margins around 20% over 2.5 years for a business that, as I said, is going to represent 40% of the earnings. But what's that worth, right? So it's just a lot of improvement across the board.

Thank you, Andrew. And I want to thank Thomas Edison and JP Morgan and Iron Man. And I think Hulk, anyone else I mentioned, and especially Alexis Moore, our producer. Thank you all for listening. If you have a question you'd like played and answered on the podcast, now's a great time to send it in. It could be in an upcoming episode. Just use the voice memo app on your phone and send it to jack.hough. That's H-O-U-G-H. @barons.com. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write us a review.

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