The accelerating expansion of artificial intelligence (AI) infrastructure and data center buildout is creating significant opportunities for companies that provide reliable power generation equipment and backup systems.

Generac Holdings Inc. (GNRC Quick QuoteGNRC - Free Report) and Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) are positioning themselves to capitalize on these developments. GNRC is strengthening its presence in the data center backup power market through large-megawatt generators and long-term hyperscaler agreements.

Caterpillar is a leading name in the global construction and mining equipment manufacturing space. The company also offers a broader range of diesel and natural gas engines, generator sets and industrial gas turbines.

However, their business models, growth opportunities, financial flexibility and operating risks differ considerably.

For investors, the choice between GNRC and CAT is not straightforward. Let us break down the fundamentals, valuations, growth outlook and risks for each company to determine which stock stands out.

The Case for GNRC

Data center buildout has emerged as a major tailwind for Generac. The company’s Commercial & Industrial (C&I) business is accelerating rapidly. It now has a sizeable data center backlog and is investing in large-megawatt generator capacity. Generac generated more than $100 million of data center revenues in the second quarter and secured two multi-year hyperscale supply agreements.

On the last earnings call, Generac noted that the data center backlog reached $1.6 billion as of July 2026, including roughly $1 billion of new orders received in the prior 90 days, but excluding any committed volumes from the second hyperscale customer. Management also raised its 2026 data center revenue expectation to roughly $450 million, underscoring the rapid scaling of this business.

Since then, Generac finalized a long-term supply agreement with Amazon. It will supply backup power generators for Amazon data centers, with initial deliveries expected to total $2.4 billion across 2027 and 2028. Generac also issued Amazon.com NV Investment Holdings LLC a warrant to acquire up to 1,693,745 shares of its common stock at an exercise price of $200.9266 per share. Amazon.com NV Investment Holdings LLC is a wholly owned subsidiary of Amazon.

Of the total warrant shares, 307,954 vested immediately. Management added that the remaining warrant shares will vest in tranches contingent upon aggregate gross payments, net of certain offsets, received by Generac and its affiliates from or on behalf of Amazon and the affiliates for backup power generators, extending up to a total of $8 billion of qualifying payments.

The Amazon agreement adds considerable scale and visibility to a data center business that is fast emerging as Generac’s key growth engine. 

Generac Holdings Inc. Revenue (Quarterly)

Generac Holdings Inc. revenue-quarterly | Generac Holdings Inc. Quote

Management expects (as announced on the last earnings call) C&I segment net sales to increase in the low 30% range in 2026, up from the prior mid-to-high 20% outlook. The company is ramping production at existing domestic and international facilities and accelerating the outfitting of its Sussex, WI, facility. On the second-quarter earnings call, management said production at Sussex was expected to begin by the end of the third quarter, roughly a quarter ahead of its prior schedule. Management also acquired the Belvidere, IL, packaging facility. The Enercon buyout (completed earlier this year) is expected to boost Generac’s vertical integration and support margin expansion for megawatt backup power offerings.

However, data center market expansion brings its own set of concerns. With increasing reliance on this end market, Generac is exposed to cyclical capital spending cycles in AI and data centers. Any delays in manufacturing capacity expansion can also weigh on growth targets. Generac also needs to watch out for increasing competition in the data center space.

While the data center opportunity is driving investor excitement, Generac’s residential business still represents a major part of it. The company's residential operations remain sensitive to power outage activity and demand for discretionary home improvement products. Revenues from the Residential segment were down 2% year over year to $621.3 million. The decline was due to lower energy storage system and portable generator shipments, largely offset by higher home standby generator sales.

The residential solar and storage market also remains challenging due to policy and macro headwinds. Management reduced its 2026 Residential growth outlook to high single-digit growth from roughly 10%, citing the low outage environment, affordability concerns and a small divestiture.

Excluding tariff refunds, management expects 2026 gross margin near the low end of the prior 38.5% to 39.5% range due to higher C&I mix. With approximately $1.33 billion in outstanding debt at the end of June, Generac must carefully balance capacity investments, working capital requirements and financial flexibility as it pursues the long-term growth opportunities.

The Case for CAT

Caterpillar's investment appeal rests on its extensive power generation capabilities and diversified industrial operations. The company’s Power & Energy segment portfolio includes integrated systems and solutions, reciprocating engines, generator sets, turbines and turbine-related services, electrified powertrain and zero-emission power sources and service solutions development.

Caterpillar is also expanding aggressively in data-center power, increasing competitive pressure. Second-quarter 2026 Power & Energy sales reached $8.2 billion, up 17% year over year. Sales to users grew 33% in the Power & Energy segment. Within Power generation, sales to users grew 72%, supported by strong demand for large gensets and turbines used in data center applications.

Caterpillar also reported a substantial increase in its overall backlog, which reached $72 billion at the end of June, up approximately $35 billion from the prior-year period. Importantly, this is Caterpillar's total company backlog rather than a data center-specific figure.

The company added that all three segments contributed to year over year and sequential backlog growth. Management highlighted that some Power & Energy customers were placing orders extending as far as 2030.

Caterpillar expects Power & Energy margins to improve year over year in the third quarter, supported by higher sales volumes and favorable pricing, partially offset by higher manufacturing costs and capacity expansion expenses.

Caterpillar Inc. Revenue (Quarterly)

Caterpillar Inc. revenue-quarterly | Caterpillar Inc. Quote

The company expects full-year 2026 power generation growth in both Cat reciprocating engines and Solar Turbines, supported by increasing energy demand as cloud computing and generative AI drive extensive data-center build-outs.

To address growing demand, Caterpillar is expanding manufacturing capacity. The company is restarting a 10-MW medium-speed gas reciprocating platform, bringing approximately 1.5 GW of capacity back online, with shipments expected to commence in the fourth quarter.

Caterpillar’s diversified business provides a competitive edge. On Sept. 30, the company announced plans to invest approximately $1 billion in North Carolina to expand manufacturing capacity for products that support its Cat Compact business, underscoring growth opportunities outside power generation. The company also announced an agreement to acquire John Fabick Tractor Company. Fabick is a CAT dealer serving Wisconsin, parts of Missouri, IL, and Michigan’s Upper Peninsula.

In the last reported quarter, Caterpillar generated $5.1 billion in Machinery, Power & Energy free cash flow and ended June with $6.7 billion in enterprise cash. The company also returned $2.2 billion to its shareholders through dividends and buybacks.

Nevertheless, Caterpillar faces plenty of challenges. The company’s business remains susceptible to geopolitical situations which continue to be uncertain. Tariffs represent another concern. Management now expects full-year 2026 tariff costs of around $2.2 billion or at the low end of the previously guided range, excluding expected IEEPA tariff recoveries of $400 million. Tariff impact on second-half adjusted operating profit and margins to be limited as it laps prior costs, added management.

Price Performance & Valuations of GNRC & CAT

Year to date, GNRC and CAT are up 45.5% and 28.4%, respectively.

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GNRC is trading at a forward price-to-earnings multiple of 16.78X, lower than CAT’s 22.98X.

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How Do the Consensus Estimates Compare for GNRC & CAT?

Analysts have lowered their earnings estimates for GNRC by 0.5% for the current fiscal year in the past 60 days.

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Estimates have been revised up 1.9% for CAT’s bottom line in the same period.

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GNRC or CAT: Which Is a Better Pick

Both GNRC and CAT carry a Zacks Rank #3 (Hold) at present.

Despite GNRC's strong data center growth prospects and relatively attractive valuation, CAT appears to be the better pick, supported by its diversified business portfolio, robust backlog and stronger financial flexibility.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.