Caterpillar stock drops sharply as AI trade loses momentum

Caterpillar Inc. became an “AI darling” out of the blue because of the heightened power demand brought on by the spread of data centers. However, sentiments have shifted, and its stock is now on a decline, raising eyebrows and forcing investors to ask important questions rather than just giving in to FOMO. 

Caterpillar Inc. saw an uncharacteristic 4.7% drop in its shares on Wednesday, its worst single-session performance since April.

By Thursday, when five sessions simultaneously ended, the stock had fallen by about 9.6%, leading other Dow Jones Industrial Average decliners, as it pulled away from its record high of around $627.50, a level it achieved just days before.

Why’s Caterpillar’s stock down?

The biggest reason for this slide has been attributed to growing market skepticism about the sustainability of AI-driven/motivated trades. Experts have admitted that anything related to AI is suddenly underperforming, and CAT, the surprise AI darling, is not exempt.

Many investors, especially those who just joined the CAT wagon, did so because they saw it as a play on AI infrastructure. Everyone wants AI, AIs need data centers, data centers need power generation equipment, and gas turbines used to support the massive electricity demands of AI data centers, which is where Caterpillar comes in.

“The AI phenomenon has helped multiple expansions for many AI-related stocks. Now it is causing some multiple contractions,” Matt Maley, chief market strategist at Miller Tabak + Co, said.

Aside from the AI hype factor, another potential reason for the fall is the disconnect in earnings between the company’s revenue segments. While its Energy and Transportation segment, the largest one, has been processing demands related to data centers and has seen a 17% sales jump, the other major segments from which it generates revenue have been more sluggish, with narrowing margins and unfavorable pricing.

Despite the drop in its stock value, Caterpillar maintains a record backlog of nearly $40 billion, largely due to the data center “gold rush.” As such, in the long term, its value is evident, and many analysts have treated the dip as a buying opportunity.

Caterpillar has cemented its status as an AI infrastructure play

If there was any doubt that CAT qualifies as an AI infrastructure play, it was eliminated in November when Caterpillar signed a strategic agreement with Vertiv to develop on-site power and cooling solutions specifically for AI workloads.

The partnership will integrate Vertiv’s power distribution and cooling portfolio with Caterpillar’s and its subsidiary Solar Turbines’ product and expertise in power generation and CCHP (Combined Cooling, Heat and Power) to deliver pre-designed architectures that simplify deployment, accelerate time-to-power, and boost performance for data center operations.

“This collaboration with Caterpillar and Solar Turbines is a cornerstone of our Bring Your Own Power & Cooling (BYOP&C) strategy and aligns seamlessly with our grid-to-chip framework by offering resilient, on-site power generation solutions. This is optimal for customers looking to reduce or eliminate grid dependence,” said Gio Albertazzi, CEO, at Vertiv.

Jason Kaiser, group president of Caterpillar Power & Energy, highlighted the growing demand for “robust and scalable power infrastructure and cooling” motivated by AI-driven workloads and claimed the collaboration with Vertiv will enable them to deliver “integrated, on-site energy solutions that lower PUE and meet customers’ evolving needs.”

The Vertiv and Caterpillar Memorandum of Understanding (MOU) has been touted as a crucial step in further refining the ecosystem, enabling customers to overcome energy constraints and deploy optimized AI centers.

However, something else it does is establish Caterpillar as a long-term player in the AI game, which means CAT as an AI infrastructure play makes even more sense.

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