Gas-Fired Data Center Cooling Demand Will Drive Long-Term Opportunity In AI Infrastructure

Catalysts

About Tecogen

Tecogen designs and manufactures natural gas powered chiller and cogeneration systems that reduce electric demand for mission critical cooling applications such as AI data centers.

What are the underlying business or industry changes driving this perspective?

• Rapid growth in AI computing and the associated surge in high density data centers is straining grid capacity, positioning Tecogen’s gas based chillers as a practical solution to free up IT power and drive product revenue growth. Even a few 200 megawatt campuses can translate into tens of millions in potential sales.
• Worsening utility power constraints and long interconnection timelines are pushing developers toward on site power optimization. Tecogen’s chillers can be a lower cost alternative to incremental gas turbines and can support structurally higher demand, improving visibility into multi year revenue and backlog expansion.
• The emerging preference among hyperscalers and large colocation developers for diversified cooling architectures creates room for Tecogen to supply 30% to 50% of total cooling capacity on new builds. This could raise overall company revenue while leveraging fixed costs to expand operating margins as volumes scale.
• The deepening relationship with Vertiv, now owned by an operational leader in its U.S. chilled water group, provides a path to large scale manufacturing and channel access to blue chip data center customers. This can accelerate order flow and support margin improvement through higher throughput and better purchasing power.
• Ongoing investments in engine platform enhancements and contract manufacturing for sheet metal assemblies are designed to lengthen service intervals and increase factory throughput. This could set up a mix shift toward higher margin product and service revenue and improve net margins once near term cost headwinds subside.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Tecogen's revenue will grow by 52.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -19.6% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $12.1 million (and earnings per share of $0.4) by about December 2028, up from $-5.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 57.6x on those 2028 earnings, up from -33.1x today. This future PE is greater than the current PE for the US Building industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The pivot toward AI data center cooling remains largely pre revenue, with only a single LOI, no signed hyperscale projects, uncertain validation timelines, and tenant dependent build schedules. These factors could delay or reduce anticipated product sales growth and push out revenue inflection.
• Despite strong interest from chipmakers and hyperscalers, Tecogen is still a small supplier. Its manufacturing capacity, reliance on new contract manufacturers, and early stage Vertiv partnership may fall short of the hundreds of chillers per year that large developers require, limiting scale benefits and constraining gross margin expansion.
• Current operations show deteriorating profitability, with net loss more than doubling year over year, gross margin compressing from above 40 percent to just over 30 percent, and service margins hit by higher labor and material costs. These pressures could persist longer than expected and weigh on net margins and earnings.
• The long term shift toward lower carbon and fully electric or alternative cooling solutions for data centers, combined with regulatory or customer pushback on expanded natural gas usage, could limit adoption of Tecogen’s gas based chillers and cap both revenue growth and long run margin potential.
• A growing portion of the narrative depends on a small number of very large AI data center projects where developers may prefer incumbent vendors, dual supply chains, or standard electric chillers to reduce risk. This could result in Tecogen capturing only a fraction of the expected load and leave forecast revenue, gross profit, and earnings below optimistic expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $15.0 for Tecogen based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $99.3 million, earnings will come to $12.1 million, and it would be trading on a PE ratio of 57.6x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $6.03, the analyst price target of $15.0 is 59.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.