After Caterpillar's stock surged to a record high following better-than-expected Q3 earnings, Morgan Stanley issued a warning: the valuation multiples assigned to the company's power generation business have far exceeded those of AI giant NVIDIA and energy leader GE Vernova. This exuberance has pushed the stock price to a "perfect pricing" level, where any minor disruption could trigger a sharp correction.

According to trading desk reports, Morgan Stanley analysts stated in an October 30 note that at the current stock price, the market is valuing Caterpillar's power generation business at an EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple ranging between 58x and 103x.

To put this into perspective, energy sector peer GE Vernova trades at a multiple of around 28x, while the highly sought-after AI chip leader NVIDIA is valued at just 25x. This implies the market believes Caterpillar's power generation business is more valuable than the related operations of the world's top tech and energy companies.

Analysts cautioned that to justify Caterpillar's current $585 stock price, the market must accept one of two extreme scenarios:

Either Caterpillar's power generation business—which accounts for only about 12% of total sales—is trading at a valuation more expensive than NVIDIA and GE Vernova; Or the company's remaining traditional cyclical businesses (such as construction and resource extraction) are being valued at "absurd levels" far above historical norms.

Even under the most optimistic assumptions—assigning Caterpillar's power generation business a 45x P/E multiple (in line with GE Vernova)—the implied valuation for its other cyclical businesses (construction machinery, resource industries, etc.) remains as high as 28x. Meanwhile, the adjusted operating margins for these businesses are contracting quarter-over-quarter, with Q3 showing a nearly 100-basis-point decline sequentially.

The market is either paying a sky-high premium for the power generation business or revaluing cyclical businesses to irrational highs amid shrinking margins.

Morgan Stanley estimates that even assuming a 30%+ annual growth rate for backup generators, over 65% growth for primary power solutions, and factoring in a 1.5-3x service multiplier effect, it would still be difficult to achieve the bullish 2027 power business sales target of $20 billion. The report suggests:

For data center-related themes, Cummins offers more reasonable valuations with lower risk.

The report maintains Caterpillar's 2026 EPS estimate at $19.24, with a $380 target price based on a 20x P/E—already above the company's historical range of 13-22.5x, implying a 35% downside from current levels.