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On Sept. 16, Generac (NYSE: GNRC) announced a multi-year deal with Amazon (NASDAQ: AMZN) for large-scale backup generators and power hardware to power Amazon Web Services data centers. Under the deal, Amazon will pay Generac $2.4 billion for equipment deliveries over the next two years, and orders could scale to $8 million through September 2033.
The deal comes as hyperscalers search high and low for power solutions for energy-hungry artificial intelligence data centers. Here's what investors need to know about Generac's massive deal with Amazon, and what it means for the company's long-term outlook.
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Modern AI data centers require a massive amount of power. Traditional data centers run at 5 kilowatts (kW) to 15 kW per server rack, but next-generation data centers loaded with high-end graphics processing unit (GPU) clusters, such as Nvidia's H200 and Blackwell chips, draw 40 kW to 120 kW per rack. On top of that, AI campuses could require enough electricity to power roughly 400,000 to 800,000 homes. In northern Virginia, the world's largest data center hub, data centers use roughly one-quarter of the state's total electricity supply.
Hyperscalers don't just need power. They need reliable, 24/7 baseload power. That's because frontier models train nonstop across tens of thousands of GPUs for months at a time. Because these models use parallel processing, power disruptions can corrupt training and cost valuable time and money.
The need for reliable power is opening the door for industrial operators like Generac to meet it. With regional electric utilities facing bottlenecks and long interconnection queues, major technology companies like Amazon must procure on-site power solutions, and demand for power equipment has surged over recent years.
Traditional suppliers such as GE Vernova, Caterpillar, and Cummins have equipment backlogs stretching out for years, creating an ideal opening for Generac to capture market share by committing dedicated factory capacity and faster delivery timetables.
Expanding into data centers is part of Generac's pivot into being an integrated energy solutions provider. The company has historically provided standby generators to residential and commercial customers, with its business heavily skewed toward residential customers. Its standby generators were its core product, targeting customers in regions prone to weather-related power outages.
Generac's business model has strong margins, and its brand is recognizable in backup power. However, sales were highly vulnerable to swings driven by high-profile weather-related disasters that spurred growth. During years of mild storm activity, sales would drop off. Sales were also uneven. A customer buying a generator may not need to buy a new one for another decade or longer.
Generac is scaling its Commercial and Industrial division, and landing a top hyperscaler could accelerate that transition by shifting its focus to systems tailored to high-density compute facilities. By expanding into data centers, Generac can broaden its customer base and stabilize its business model with multi-year contracts that provide revenue years down the road.
Generac's deal with Amazon is staggering. Last year, Generac's net sales across all product lines totaled $4.2 billion, with its commercial division sales at $1.5 billion. Amazon's baseline commitment of $2.4 billion represents half of its annual revenue, and its $8 billion upside is huge for a company with a market capitalization of roughly $13 billion today.
The company granted Amazon warrants to purchase up to 1.69 million common shares at an exercise price of $200.93, which is just under 3% of Generac's total shares outstanding. While dilutive, the equity is modest, and the remaining 1.38 million warrant shares vest in stages only as Amazon places actual orders, aligning both Amazon's and Generac's incentives.
Generac's Amazon deal marks an important pivot for a company that has historically relied on residential sales. This agreement could be the first of many for Generac. For investors seeking exposure to booming electricity demand from hyperscale AI data centers, it looks like a good sign.
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Courtney Carlsen has positions in GE Vernova, Generac, and Nvidia. The Motley Fool has positions in and recommends Amazon, Caterpillar, Cummins, GE Vernova, and Nvidia. The Motley Fool has a disclosure policy.
Generac Entered a Massive Deal With Amazon. Is It Time to Buy the Stock? was originally published by The Motley Fool
