BorgWarner's Data Center Deal Has It Shifting Gears From Drivetrains to Large Language Models
Key Points
BorgWarner recently signed a supply agreement to build turbine generators for the data center market.
As EV adoption slows in North America, this emerging market opportunity comes at just the right time.
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BorgWarner (NYSE: BWA) is a name investors associate with turbochargers and drivetrains, but now it's thrown its hat into the hyperscaler ring. In February, the company signed a master supply agreement to provide modular turbine generators to help power data centers.
The deal with TurboCell, a subsidiary of infrastructure developer Endeavor, marks an important entry into the industrial power market. Management expects production to begin in 2027, with sales exceeding $300 million in the first year and the potential to grow in the "mid-teens" over the coming decade.
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Shifting gears from powertrains to power grids
The move into power generation is intended to capitalize on the rising demand for electricity from data centers. Research firm MarketsandMarkets pegs the addressable market for data center generators at $8.5 billion today.
BorgWarner's turbine systems will provide backup and prime power for these facilities. The technology leverages the company's core engineering expertise in turbochargers, thermal management, and power electronics. This allows for valuable vertical integration, with BorgWarner controlling roughly 65% of the content in each system.
The generators will also be fuel-flexible, capable of running on natural gas, propane, diesel, or hydrogen. This positions the company to meet strict emissions standards while providing the reliable power that data centers require.
Management expects the new business to deliver mid-teens incremental margins and be accretive to earnings per share in year one. If things go well, the company will look to expand by supplying battery energy storage systems as well.
The auto business still pays the bills
While the data center market is attractive, the company is an auto parts manufacturer at its core. Products for internal combustion engines (ICE) and hybrid vehicles still generate over 80% of total revenue and account for the majority of BorgWarner's profits. This year, management projects a decline in light vehicle production in its global markets, which will weigh on top-line growth.
Meanwhile, the transition to electric vehicles (EVs) continues to be a volatile one. The battery energy systems division saw sales decline 32% year over year in the first quarter of 2026, driven by weaker incentives in North America and demand in Europe. New contract wins in China have helped offset some of the challenges, but its battery segment is still expected to decline by 35% to 40% this year.
Despite the weakness in EV adoption, the company steadily improved its operating margins last year and grew operating cash flow by nearly 20%. That trend continued in the first quarter, thanks to prior cost cuts, with operating margins up by 50 basis points to 10.5%.
As investors have become accustomed to, once the data center news hit, the stock went on a tear. The share price has more than doubled in the past year, and the stock now trades at 13 times this year's earnings estimates.
The multiple may appear cheap on the surface, but some caution is warranted. Given its industry association, BorgWarner rarely trades above 10 times forward earnings. The infrastructure market provides a welcomed change of pace for the company, but it's still too early to tell how much of it actually captures.
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Bryan White has no position in any of the stocks mentioned. The Motley Fool recommends BorgWarner. The Motley Fool has a disclosure policy.
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