Eaton Stock Doubles in a Year, Poised for AI-Driven Energy Demand Growth

Key Takeaway

• Eaton Corporation's stock surged 41% in 2024 and 103% over the past year, driven by AI-fueled energy demands.
• The company raised its CAGR forecast for its global addressable market to 25% (2022-2025), with data centers and IT accounting for significant revenue growth.
• Analysts highlight Eaton's extended revenue visibility from mega projects, with a bull case target of $365, implying a 7% upside.

Eaton's Stock Performance

Shares of Eaton Corporation have experienced a significant rally, increasing by more than 41% since the start of 2024 and approximately 103% over the past year. Eaton, a company specializing in electrical components and power distribution systems, has exposure to various end markets, including aerospace, automobiles, and electric charging. Wall Street analysts attribute this growth to the rising interest in artificial intelligence (AI) and the subsequent demand for power management solutions.

Bank of America analyst Andrew Obin highlighted Eaton as a "pure-play electrical equipment" stock with high-growth businesses beyond data centers. He noted that the company's restructuring program should also boost margins. "While data center remains the strongest end market, it seems that other end markets (residential, distributed IT) improved more than expectations to drive beats," Obin wrote.

AI and Data Center Demand

The increasing need to support power-hungry AI models is expected to benefit companies like Eaton. The company has raised its compound annual growth rate (CAGR) forecast for its global addressable market to roughly 25% between 2022 and 2025, up from a previous forecast of 16%. Last year, data centers and IT accounted for 14% of Eaton's revenues.

"As expected, the biggest increase is coming from the very strong demand for AI data centers, which is reflected both in our orders and in our negotiation pipeline," said CEO Craig Arnold during an earnings call last month. "Here, orders on a trailing 12-month basis have more than doubled, and our negotiations in the U.S. have increased by more than 4x."

Mizuho’s Brett Linzey also emphasized Eaton's "extended revenue visibility" given its "mega projects" aimed at meeting reshoring and data center needs. Linzey's $365 bull case implies a 7% upside from Friday’s close. "We don’t envision significant multiple expansion for ETN from here but believe the stock can continue to grind higher in-line with earnings growth," he wrote.

Energy Demands and Infrastructure

The growing energy demands of AI and data centers are putting pressure on electricity grids. Data centers are expected to double their electricity consumption between 2022 and 2026, according to the International Energy Agency (IEA). In 2022, data centers consumed 460 terawatt hours of electricity, and this figure could reach 1,000 terawatt hours by 2026, equivalent to the electricity consumption of Japan.

Sasha Luccioni from Hugging Face, a machine-learning company, noted that generative AI is particularly energy-intensive. "Every time you query the model, the whole thing gets activated, so it’s wildly inefficient from a computational perspective," she said. A recent study by Luccioni and colleagues found that generative AI systems might use around 33 times more energy than machines running task-specific software.

Utilities firms in the U.S. are beginning to feel the pressure from data center demands, according to Chris Seiple at Wood Mackenzie. "They’re getting hit with data center demands at the exact same time as we have a renaissance taking place – thanks to government policy – in domestic manufacturing," he explained.

Street Views

• Andrew Obin, Bank of America (Bullish on Eaton):

  "While data center remains the strongest end market, it seems that other end markets (residential, distributed IT) improved more than expectations to drive beats."

• Brett Linzey, Mizuho (Neutral on Eaton):

  "We don’t envision significant multiple expansion for ETN from here but believe the stock can continue to grind higher in-line with earnings growth."

Management Quotes

• Craig Arnold, CEO of Eaton:

  "As expected, the biggest increase is coming from the very strong demand for AI data centers, which is reflected both in our orders and in our negotiation pipeline. Here, orders on a trailing 12-month basis have more than doubled, and our negotiations in the U.S. have increased by more than 4x."