The data center arms race extends to power infrastructure, with Amazon signing an $8 billion seven-year strategic deal with Generac.

Generac, a backup generator manufacturer, reached a long-term supply agreement with Amazon for up to $8 billion over seven years, which sent its stock price soaring more than 30% in pre-market trading, marking the largest single-day gain since Bloomberg data dates back to 2010.

Under the agreement, Generac will supply backup generators to Amazon's data centers and issue warrants to Amazon, allowing it to purchase up to 1.69 million Generac shares at $200.93 per share. The initial deliveries, valued at approximately $2.4 billion (about $1.2 billion annually), are scheduled for completion between 2027 and 2028, providing clear demand support for Generac's previously pursued capacity expansion.

More importantly, this deal ties Generac to Amazon's data center expansion cycle. The market is thus seeing that the electricity demand driven by AI computing power investment is spreading from computing hardware such as GPUs and servers to peripheral power infrastructure such as generators, power grids, and energy storage.

The $8 billion order is not a one-off purchase; warrants strengthen long-term commitment.

The key to this agreement is not just the potential order size of $8 billion; the accompanying warrant arrangement also signals a long-term cooperation between the two parties.

According to the terms of the agreement, the warrants obtained by Amazon will be unlocked gradually as the cumulative purchase amount increases. Amazon will only be able to obtain all warrants when the cumulative purchase amount of Amazon diesel generators reaches $8 billion. Approximately 18% of the warrants will vest immediately upon signing the agreement.

Wells Fargo analyst Praneeth Satish points out that this arrangement means that the partnership between Amazon and Generac is not limited to the initial $2.4 billion order in 2027-2028, but is intended to cover a longer delivery cycle, providing a clear endorsement of the long-term strategic cooperation between the two parties.

For Generac, the certainty of order size and delivery cycles provides a clearer demand basis for its capacity expansion. Previously, the market had doubts about whether the company could secure sufficient orders for its capacity expansion, but Amazon's large, long-term procurement commitments directly improve the visibility of future revenue.

Earnings forecasts have been revised upwards, and data center orders are expected to change the valuation logic.

Wall Street analysts generally believe that this agreement not only means new revenue, but may also drive changes in Generac's profit expectations and valuation logic.

William Blair industrial sector analyst Brian Drab called the seven-year agreement a “major victory” for Generac, estimating it will boost the company’s EBITDA by more than 20% by 2028. He believes that, given investors’ continued concerns about the sustainability of data center capital expenditures, this long-term agreement increases the visibility of the company’s future performance and helps reduce the market’s risk discount on its capacity expansion.

Prior to the announcement of the agreement, Generac's stock price was around $175. Praneeth Satish had previously estimated that the company's reasonable value, based solely on the approximately $1 billion in stable annual revenue generated from the agreement with its first hyperscale data center and colocation customer, was around $185 per share, meaning that the market was barely pricing in any further data center orders at the time.

Brian Drab also pointed out that before the agreement was signed, Generac's stock price corresponded to approximately 10 times its 2027 EBITDA, while the company's EBITDA growth rate is expected to exceed 20% in the coming years. As Amazon orders materialize, the market may not only revise its earnings forecasts upwards, but may also reassess the certainty of the company's future earnings and its valuation level.

From AI computing power to power infrastructure, the investment chain is extending.

The Generac-Amazon deal also extends the investment logic for data centers from "computing power" to "electricity".

As data center construction accelerates, power supply has become a critical prerequisite for deploying new computing power. Although backup generators are peripheral equipment for data centers, their demand is directly related to the scale of data center construction and the requirements for power supply reliability. Therefore, Generac's securing long-term orders from large technology companies signifies that AI infrastructure investment is spreading to a broader power equipment supply chain.

Rob Bittencourt, head of global thematic investments at Apollo, previously stated that the US reindustrialization process has "started" and will require trillions of dollars in investment, a significant portion of which will be concentrated in computing power-related fields. Generac's recent securing of a long-term contract from Amazon further demonstrates that this round of capital expenditure is not only benefiting chip, server, and data center operators, but is also spreading to manufacturers of power generation equipment, power grids, and other power infrastructure.

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