UBS: Data center construction to accelerate again in 2027, with Caterpillar (CAT.US), Cummins (CMI.US), and Quanta Services (PWR.US) set to benefit from the "AI infrastructure boom"

Zhitong Finance APP has learned that UBS expects, despite persistent supply chain constraints, data center developers are still expanding capacity, and that demand for artificial intelligence infrastructure will accelerate by 2027, creating opportunities for industrial equipment manufacturers and engineering firms. In a research report dated October 16, UBS analyst Steven Fisher stated that industry experts attending Data Center World Expo in Singapore noted that order flows are accelerating, multi-year capacity reservations continue to rise, and there is strong confidence that investment in AI infrastructure will continue after 2027. These findings suggest that even as the broader economy faces inflationary pressures, data center spending remains a key growth driver for industrial companies.

Power Generation and Construction Companies Poised to Benefit

UBS identified Caterpillar (CAT.US), Cummins (CMI.US), and Quanta Services (PWR.US) as beneficiaries of the ongoing data center construction boom. Caterpillar and Cummins are well-positioned to capitalize on growing demand for power generation equipment, while Quanta Services is set to benefit from grid investments. Caterpillar told the UBS team that demand for power generation equipment remains exceptionally strong and that the company is expanding capacity.

The report also emphasized the growing interest in "behind-the-meter power generation," a model that allows data centers to generate power onsite instead of relying solely on the public grid. UBS expects that most projects will still primarily operate in grid-connected mode with traditional diesel backup systems through 2028 or 2029. The ultimate combination of onsite power generation, energy storage, and grid connectivity will determine how much manufacturers can profit.

Supply Shortages Remain a Constraint

Industry experts list equipment availability and manufacturing capacity as primary barriers to data center expansion. Suppliers of cooling systems, electrical equipment, and power generation technologies are racing to shorten delivery times and increase production. Customers are increasingly favoring prefabricated and modular systems to speed up construction and reduce labor requirements.

The industry is also transitioning toward 800-volt DC distribution, expected to be deployed between 2027 and 2029. UBS stated that this technology should reduce copper demand, heat generation, and the complexity of power distribution systems.

A Rising Share of Construction

UBS estimates that data centers directly account for about $63 billion, or roughly 5%, of the $1.3 trillion non-residential construction market in the United States. However, including indirect expenditures for manufacturing facilities, power infrastructure, and related projects, the bank estimates data centers drive 20% to 30% of overall non-residential construction activity, as well as most of its growth.

This strong level of spending contrasts with worries about the broader industrial economy. UBS noted that inflation linked to the Iran conflict and rising interest rates are complicating industrial recovery expectations. The bank expects higher input costs will become more apparent in fourth-quarter results, especially for companies exposed to fuel and material costs.

Caterpillar Power Business Margins Under Scrutiny

The Power and Energy segment at Caterpillar (CAT.US) delivered second-quarter profits that exceeded expectations, with incremental margins reaching 39%. UBS stated that while the consensus still expects high incremental margins in the third and fourth quarters, they are likely to fall from second-quarter levels. Caterpillar has warned that the exceptionally favorable margin performance in Q2 may not continue.

Investors are also questioning whether industrial stocks can continue to outperform if AI-related order growth slows. Fisher believes that even though the absolute level of orders on hand remains high, any significant slowdown or leveling off in Caterpillar's sequential order growth could make further outperformance harder to achieve.

Risks in AI Investment

UBS acknowledges that as technological advances reduce computing costs and smaller AI models gain wider adoption, the AI infrastructure boom could eventually cool off. Such developments could suppress the profitability of AI companies and reduce demand for new data centers. However, the bank continues to expect technology adoption to create additional opportunities for industrial suppliers, while warning investors to pay attention to the sustainability of infrastructure spending.

The report also raised questions about the financial stability of newer cloud computing providers, following a sell-off in CoreWeave (CRWV.US) bonds. UBS noted that, compared to well-established hyperscale cloud operators, industrial suppliers generally do not disclose enough information to determine their exposure to these clients. As investors assess the durability of equipment backlogs and future orders, this distinction may become increasingly important.