GE Vernova Is Positioned to Benefit From Electrification and Decarbonization Themes

Equity Analyst

Brett Castelli

GE Vernova’s strategy is centered on developing products and services that enable electrification and decarbonization. The company's power segment largely consists of its gas power operations, which has the globally largest installed gas turbine fleet. We expect the ongoing push for decarbonization to drive continued investing in efficiency improvements for future product generations, as well as explore more step-change improvements, such as hydrogen or carbon capture capabilities.

GE Vernova has historically had market-leading positions in many of its business segments, such as gas power or US onshore wind; however, its margin profile has not matched this leadership position. As a stand-alone company, we expect the company's top focus to be on improving margins across business segments. We expect this to be accomplished through multiple avenues. First, we expect to see a more disciplined approach to new-business underwriting, prioritizing profitability over market share. In addition, a streamlining of the product portfolio, most notably in the company's wind segment, should further benefit margins. Wind profitability has historically been plagued by unending product innovations and shortening product development cycles in a quest to lower costs. We expect this strategic change to be a large mover in improving the profitability of the company’s onshore wind business. Finally, the adoption of the Lean operating model, which has driven $1 billion of fixed costs out of the gas power business since 2018, should drive further margin improvement as it is implemented across the broader portfolio.

Historically part of the broader GE portfolio, we expect significant strategic enhancements via focus and capital allocation to GE Vernova. This could include investing in organic growth, where we see the electrification segment as an area of priority, and inorganic opportunities. In the near term, we do not expect any sizable acquisitions as the company focuses on execution, but we see further potential.

Business Strategy & Outlook

We assign GE Vernova a no-moat rating, consistent with our ratings for peers Siemens Energy and Vestas. GE Vernova enjoys leadership positions in oligopolistic markets, but historical returns on invested capital have been poor. While we expect profitability to improve, we don’t believe the company exhibits enough qualities to warrant a moat. 

GE Vernova’s power segment consists largely of its gas power business, with smaller contributions from hydroelectric, nuclear, and steam. Given gas power accounts for the vast majority of segment profitability, we focus our moat analysis on the gas power business.

The market for gas turbines is fairly concentrated in the hands of three global players: GE Vernova, Siemens Energy, and Mitsubishi. GE Vernova has a long history in gas turbines and has the largest installed fleet of gas turbines globally. Gas turbines are highly engineered equipment, and we think the company benefits from a degree of intangible assets given its long history and know-how. However, the market for gas turbines has declined over the past decade, which has led to a more competitive industry environment for newbuild opportunities. For reference, GE Vernova’s sales of heavy-duty gas turbines has declined from 108 units in 2014 to 58 in 2023. 

As the market for new gas plants has slowed, the business has shifted to a more service heavy revenue mix. We estimate roughly 70% of gas power’s revenue is from service. As such, we view the critical moat question for gas power to be whether it benefits from switching costs in its services offerings. Despite the company’s leading installed base and majority service revenue, we don’t see enough evidence of switching costs. GE Vernova has an installed fleet of 7,000 gas turbines, but only has service contracts on 1,700 out of 7,000. We attribute the gap between installed fleet and service contracts largely to the turbine model. Much of the 1,700 turbines under service contracts are from the company’s newer models, F- and H-class turbines. We view the company as benefiting from switching costs to these newer models via service contracts and transactional service opportunities. However, on older turbine models we view the service opportunity to be much more commoditized, and we do not think GE Vernova benefits from switching costs. In addition to having service contracts on only 25% of its installed fleet, customer renewal rates are approximately 70%, further supporting our opinion of a lack of switching costs.

GE Vernova’s wind segment consists of its onshore and offshore wind turbine business. The company’s onshore wind market share (excluding China) has historically been second behind Vestas. Broadly, we view the wind turbine business as more moaty than solar panels, and historical returns on invested capital bear this out. We attribute this to a greater relative level of intangible assets in wind and less prevalence of low-cost Chinese suppliers. While wind’s moat characteristics are relatively more attractive than solar, we award the segment a No Moat rating, consistent with our moat rating on Vestas.

The wind turbine plays a crucial role in the levelized cost of energy for wind, accounting for approximately half of the levelized cost of energy for an onshore wind project and 25% for an offshore wind project. Given the outsize role of the wind turbine in the overall cost of the project, wind turbine suppliers face consistent pressure to: keep prices low, and regularly create product innovations to improve their capacity factors. However, limited product differentiation and product innovations that are not groundbreaking enough will not avoid replication, and limit pricing power of manufacturers.

In comparison to gas turbines, wind offers less of a lifecycle service opportunity for turbine makers, resulting in lower switching costs. Unlike other razor/blade business models, such as the elevator and aerospace engine businesses, spare parts of other brands are sold by multiple service providers. In addition, oftentimes customers (asset owners) will perform operating and maintenance themselves rather than relying on turbine original equipment manufacturers. 

We expect GE Vernova’s wind segment profitability to improve in coming years as it makes a strategic shift to focusing on fewer markets and fewer product variations. In particular, the company is increasingly focused on the US onshore wind segment, where it has historically held top market share. We think the retrenchment to the US will not only improve profitability, but also increase risk from policy changes. Wind installations in the US have been sensitive to changes in US tax credits, which has led to past boom and bust cycles. While the Inflation Reduction Act is anticipated to stimulate healthy wind demand and provide long-term tax credit certainty, there remains risk from changes in the act with election cycles. 

We do not believe GE Vernova’s electrification segment warrants a moat. In general, electrification has had an inconsistent track record of profitability and has a lower service contribution to revenue mix compared with the overall business. (For reference, the electrification segment includes grid solutions, power conversion, grid software, and solar and storage technologies.)

We think the company’s grid solutions offerings, such as its high-voltage direct-current solutions, benefit somewhat from an intangible assets advantage. These solutions are mission-critical, and they are often custom designed for a specific project. However, the remainder of the offerings in this segment, such as power conversion and solar and storage, are among the least moaty in the broader GE Vernova portfolio.

None

Economic Moat

GE Vernova LLC

Earnings data Q1 2024

Earnings data Q2 2024

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GE Vernova, Inc. is a electric power industry. Its products and services generate, transfer, orchestrate, convert, and store electricity. The firm operates through the following segments: Power, Wind and Electrification. The Power segment includes design, manufacture, and servicing of gas, nuclear, hydro, and steam technologies, providing a critical foundation of dispatchable, flexible, stable, and reliable power. The Wind segment includes wind generation technologies, inclusive of onshore and offshore wind turbines and blades. The Electrification segment includes grid solutions, power conversion, electrification software, and solar and storage solutions technologies required for the transmission, distribution, conversion, storage, and orchestration of electricity from point of generation to point of consumption. The Company was founded November 09, 2021 and is headquartered in Cambridge, Massachusetts.

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