Is This Industrial Giant Actually an AI Play?

Caterpillar (NYSE: CAT) is an iconic industrial company known for its yellow construction equipment. But as artificial intelligence (AI) spreads rapidly, you need to think about Caterpillar in a broader way. Here's how this industrial giant is adapting and evolving to support the AI revolution.

The old Caterpillar is well-positioned

Caterpillar is historically known for making construction equipment, like backhoes and dump trucks. The industrial company's giant earth-moving machinery is used to build the world around us, from roads to buildings. The business is somewhat cyclical, as construction tends to ebb and flow with economic activity. However, some positive, big-picture trends are taking shape.

Image source: Getty Images.

For example, companies are increasingly reshoring production. That means new buildings and factories are needed. And artificial intelligence has led to a data center construction boom among companies that are trying to establish themselves as AI technology leaders. If there's a lot of building going on, there's likely to be a huge need for the earth-moving machines for which Caterpillar is best known.

There's more to Caterpillar than backhoes

In addition to earth-moving equipment, Caterpillar also makes power equipment. It produces engines that can provide power in remote locations or act as backups when grid power goes down. One of the most important industries for Caterpillar's power products is energy. Extracting oil and natural gas, the latter fuel being integral to the proper functioning of the electric energy grid, will be a material market for years to come.

But don't stop with oil and gas producers. The utility industry will need to spend heavily to keep up with rising electricity demand. Between 2023 and 2030, electricity demand worldwide is expected to increase by 43%. Demand from data centers is expected to jump 200%.

The grid investment needed will be another key support for Caterpillar's business. And Caterpillar's ability to provide dedicated power options before grid access is available could specifically help support faster data center buildouts. Meanwhile, its ability to provide backup power can help to keep data centers up and running during blackouts.

A lot of opportunities ahead for Caterpillar

When you step back and look at the big picture, AI is a huge opportunity for Caterpillar, well beyond its historical construction focus. However, investors aren't exactly ignoring the opportunity, noting that the stock's price-to-sales and price-to-earnings ratios are well above their five-year averages. Still, Caterpillar probably deserves a spot on your AI wish list just the same, given the tendency for sizable drawdowns among cyclical stocks.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Caterpillar. The Motley Fool has a disclosure policy.