By Jinjoo Lee

Tech companies working on artificial intelligence are in a rush to get electricity. That is creating a new windfall for manufacturers of smaller, pricier power equipment that is readily available.

Investors in turn are bidding up stocks in makers of everything from small turbines to fuel cells, sometimes to euphoric levels.

Large natural-gas turbines are a natural fit for data centers with huge power needs, but these face yearslong wait lists and lengthy construction schedules. In a recent report, Morgan Stanley estimated that U.S. data centers face a shortfall of 45 gigawatts of power, roughly the generation capacity of Illinois, through 2028. The crunch is bad enough that at least one publicly listed developer -- Fermi -- is resorting to used GE turbines.

Data centers have thus turned to more expensive off-grid solutions that are nevertheless more readily available. These include Bloom Energy's solid-oxide fuel cells, which use natural gas as fuel. Data centers are also using smaller natural-gas turbines and reciprocating engines -- the piston-and-cylinder type that cars use -- from companies like Caterpillar, Wartsila, Cummins, Rolls-Royce and Generac. Some of these are typically used for backup power or mobile applications such as oil-field services.

Shares of Bloom Energy, which had been on a flat trajectory until late 2024, have shot up after the company started announcing data-center deals with companies such as American Electric Power, Brookfield Asset Management and Equinix. Its shares jumped 18% after its earnings call last week and are now up roughly 480% this year.

Caterpillar, mainly known for construction equipment, is seeing a spurt in demand from data centers for its turbines and reciprocating engines. Sales to power-generation customers -- mainly data centers -- rose 33% in its third quarter from a year earlier. Its turbines are powering xAI's data centers in Memphis, Tenn., and the company has announced plans to supply data centers in Utah and Texas. Backup-generator maker Generac said last week it is seeing strong demand from hyperscaler tech giants, but the bullish commentary was largely overshadowed by poor sales to residential customers, who had fewer power outages during the quarter.

Bloom Energy's shares are already pricing in astronomical future demand. After its vertical rally, its shares are trading at roughly 140 times forward earnings, according to FactSet. Turbine- and reciprocating-engine makers look like more reasonable entry points, though purchasing their shares also buys exposure to other lines of business, such as construction for Caterpillar, automakers in the case of Cummins, or aviation in the case of Rolls-Royce. Caterpillar, Rolls-Royce and Cummins have all rallied this year, yet they all still trade at a hefty discount to large-turbine maker GE Vernova, which trades at 47 times forward earnings.

This type of smaller equipment is a pricey way to get power compared to large-scale, combined-cycle natural-gas turbines, such as the ones that GE Vernova produces. They also tend to be more emissions heavy, with the exception of fuel cells. But their modular nature means they become cost competitive if they are used off-grid for data centers that need power up nearly 100% of the time. When a data center uses one 500 megawatt turbine, for example, it needs another huge 500 MW turbine to ensure there is backup. By contrast, a data center using a hundred 5 MW turbines needs to purchase only a few extra smaller turbines as backup units.

Among modular solutions, the finer points of which technology wins out get a bit complicated. Solid-oxide fuel cells such as Bloom Energy's have higher upfront costs and maintenance expenses, according to research consulting firm Thunder Said Energy. However, they are more fuel efficient and don't rely on combustion, resulting in less air pollution. That may give it an edge when it comes to permitting.

Given the bottlenecks, data centers might care more about speed than split hairs about cost. Juan Macias, chief executive of AlphaStruxure, which runs on-site energy systems for data centers using a broad mix of technologies, said customers are willing to pay a premium for power that can be delivered by 2027 or 2028.

Demand is getting strong enough that equipment makers are having to think about capacity expansion. Caterpillar said last Wednesday that lead times are getting longer for some of its larger turbines and that it is "prepared to act" to increase capacity if needed. Bloom Energy has said that it is going to add 1 GW of additional manufacturing capacity, doubling its existing capacity, by December 2026.

Large turbine makers have been more cautious about adding capacity, having been burned in the aftermath of a previous tech-hype-driven overbuild in the early 2000s. GE Vernova, for example, said on its latest earnings call that the company's capital expenditures on natural-gas power and its grid business is likely to peak in 2026.

Bulls may see that as an opportunity for small equipment manufacturers, but the large-equipment makers' restraint is also a reminder that hot markets don't always last.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

November 05, 2025 05:30 ET (10:30 GMT)

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