Caterpillar data center demand faces potential slowdown

Caterpillar (CAT) executives stated on the company's second-quarter 2026 earnings call that data center customers could reduce orders for power equipment in the coming years. This concern emerged as the company reported that power generation sales to end users grew 72% in the quarter, driven by demand for large gensets and turbines used in these facilities. Management attributed this growth to the energy requirements of cloud computing and generative AI, noting that no current customer is slowing down and that buyers are requesting more units if production capacity allows.

The Power & Energy segment, which includes these data center sales, is Caterpillar's largest division. It generated $32.2 billion in revenue in fiscal 2025, an 11.6% increase from fiscal 2024. In the second quarter of 2026, segment sales reached $8.2 billion, up 17% from the same period a year earlier on a call basis. While data centers are a significant driver, the segment also maintains long-time oil and gas customers, meaning a slowdown in one area would only affect part of the total.

Caterpillar stock currently trades at 33.9 times earnings, compared with 21.9 for the S&P 500. The stock also trades at 4.9 times sales, a multiple in the upper half of its ten-year range, which has fluctuated between 1.2 and 7.0. Despite a 24.8% decline from its 52-week high, the stock has returned 61% over the past twelve months, outperforming the S&P 500's 17.3% gain. This valuation appears to assume that current power order volumes will continue.

The company holds a backlog of $72 billion as of the end of the second quarter, representing orders taken but not yet delivered. Management expects to deliver 59% of this total over the next twelve months. Some Power & Energy customers have placed orders extending into 2030, and buyers of gas engines for prime power are facing delivery dates in the back half of 2028 and into 2029. To meet this demand, Caterpillar is restarting a 10-megawatt gas engine line and plans to bring approximately 1.5 gigawatts of capacity back online.

Historical data suggests Caterpillar stock has underperformed the broader market during certain shocks. It declined 22.0% during the 2025 tariff shock, compared with a 19.0% drop for the S&P 500. During the 2023 regional banking crisis, the stock fell 17.0% while the index dropped only 6.7%. Investors should monitor the company's backlog and year-over-year changes when Caterpillar next reports quarterly results.