Caterpillar Stock Is Up 100% in a Year. Here's the Data Center Math Behind the Rally.

Caterpillar (NYSE: CAT) is an industrial giant. You probably know its yellow construction equipment and iconic logo. It also makes generators capable of providing power in remote locations. The company's stock has risen more than 100% over the past year, easily besting the roughly 18% return of the S&P 500 index (SNPINDEX: ^GSPC). And artificial intelligence is a key source of Wall Street's enthusiasm. Here's what you need to know.

Caterpillar's products are vital to the AI build-out

Worldwide spending on artificial intelligence could be as high as $2.59 trillion in 2026, according to Gartner Research. That figure would be up 47% year over year. That spending covers a lot of ground, including the construction of chip factories and AI data centers. You can't build massive facilities like these without the earth-moving equipment that Cat makes.

Image source: Getty Images.

Meanwhile, AI data centers have faced significant backlash over the electricity they consume. Getting a grid attachment was already difficult and time-consuming, so the negative views of data centers from local residents and regulators aren't helping. But, again, Cat is there to lend a hand with its power systems.

Pretty simply, Caterpillar looks like it is in the right place at the right time. This helps explain why the company's backlog at the end of the first quarter stood at record levels. The $63 billion backlog represents future revenues, and the figure was up a huge 79% year over year. The rise in Caterpillar's stock price is simply a reflection of investor enthusiasm for the company's success.

Cat: There's a problem for investors to consider

You should be happy if you purchased Caterpillar stock a year ago. However, the company's price advance has dramatically changed the valuation math if you're considering buying the stock today. Simply put, after such a large run, the stock looks expensive.

The 5.8x price-to-sales ratio is more than twice the five-year average of 2.6x. The 43x price-to-earnings ratio is more than twice the five-year average of 19x. Even if you are looking to the future, given the strong backlog, the stock still looks pricy. Caterpillar's forward P/E ratio is 36x compared to a five-year average of 17x. The 0.7% dividend yield is historically low for the stock and is even less than the 1% you'd get from an S&P 500 index fund. The data center math has fueled Cat's rally, but it also appears to have led Wall Street to place a steep premium on the shares.

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.