Here's Why This AI-Related Power Company's Stock Declined in July
Key Points
GE Vernova's valuation makes it exposed to any slowdown in orders.
More installed equipment means more long-term services revenue.
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GE Vernova (NYSE: GEV) stock declined by 15.7% in July, according to data from S&P Global Market Intelligence. The decline is a salutory reminder that valuations still matter, because there was nothing wrong with the fundamentals displayed when GE Vernova reported its second-quarter earnings report on July 22.
A nuanced dynamic
GE Vernova's recent earnings report saw management raise its full-year revenue, earnings, and free cash flow (FCF) guidance for the third time in 2026. Having guided toward revenue of $41 billion to $42 billion and FCF of $4.5 billion to $5 billion on its investor update in December, management raised guidance on the fourth quarter 2025, first quarter 2026, and recent second quarter 2026 earnings presentations such that it now stands at revenue of $45.5 billion to $46.5 billion and FCF of $11.5 billion to $12.5 billion.
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Taking the midpoint of these figures, it's clear that the $4.5 billion increase in revenue has translated into a $7.25 billion increase in FCF, implying a 161% FCF leverage. That's a highly unusual number and reflects the particularly strong demand conditions for the company's gas turbine equipment.
GE Vernova free cash flow leverage
In a nutshell, AI data centers and utilities are so desperate for power that they are willing to sign Slot Reservation Agreements (SRAs) to secure future production slots. In doing so, they pay a portion of cash upfront, which drops into GE Vernova's cash flow. That's good news because upfront cash flow has more value than cash flow later.
In addition, more equipment orders drive a ramp in long-term earnings and cash flow, as gas turbine installations lead to more lucrative long-term services sales via Long-Term Service Agreements (LTSA) attached to equipment sales.
Image source: Getty Images.
Why GE Vernova stock declined in July
Just as increased orders lead to an outsize benefit to FCF and GE Vernova's valuation and a positive impact on the stock price, any slowdown in equipment orders will disproportionately weigh on the stock on the downside, too.
As such, investors need to keep a close eye on order momentum in relation to valuation at GE Vernova. While there's nothing to suggest any slowdown in orders, the sell-off in artificial intelligence (AI) related companies in July reminded investors that with the stock trading at 33 times estimated 2026 earnings any potential slowdown will lead to a correction in the share price.
That said, now that the dip has taken place, the company is arguably set up to perform well given any further improvement in its orders outlook.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE Vernova. The Motley Fool has a disclosure policy.
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