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Why General Electric Company (GE) Stock Is Becoming a Tech Play

Relatively new CIO Jim Fowler's vision for General Electric is not only exciting, but it's also here

Late last month, General Electric Company (NYSE:GE) posted what could only be considered a successful first quarter. Although it is down a bit year-over-year, revenue if $27.66 billion topped estimates of $26.37 billion. Earnings of 21 cents per share were markedly better than the profit of 17 cents per share analysts had modeled.

Why General Electric Company (GE) Stock Is Becoming a Tech Play
Source: Shutterstock

Although GE stock fell after the news on cash flow concerns, there’s no denying the beats were a relative victory.

Most of its divisions, including Power, Renewable Energy and Aviation drove considerably higher year-over-year sales. The only clunker was the 35% dip in the company’s Energy Connections & Lighting business, but that wasn’t a surprise.

In many regards though, the detailed look at last quarter’s results don’t tell the whole story … at least not the way it should be told. General Electric is undergoing a paradigm shift, internally and externally, and the use of its legacy divisions don’t give the due attention merited by the one overarching initiative GE has cultivated.

Meet the New General Electric

Ask ten investors to describe GE as a company, most of them will rightfully explain it makes industrial, utility-scale equipment, some healthcare tech, aircraft parts and a few other big-ticket goods. And, until its late-2015 spinoff of its unit that would eventually become Synchrony Financial (NYSE:SYF), GE was in the money business as well. But digital, software-centric technology? No, that’s not what General Electric is all about.

That is, however, what GE stock is becoming all about.

Calling a spade a spade, the new-and-improved General Electric is largely being built in response to the advent of the Internet of Things. While GE was always an unstoppable behemoth, it has floundered in the wake of the technology explosion that reached a critical mass just a few years ago. General Electric had to adapt, or GE stock was doomed to yet another decade of poor performance.

It adapted.

What it became is perhaps best described by something CIO Jim Fowler explained to Forbes just a few days ago:

“We transformed IT from back office administrators to productivity makers, delivering more than $700MM in productivity in 2016. We stopped being a piston in the engine of each individual business and became the engine for all of GE by working horizontally. We reinvented how IT operates and serves the business units, from being reactive to business needs to proactively creating solutions that drive business. We moved away from vertical business silos, and now operate horizontally across the company. There is no longer IT at GE there is only DT … Digital Technology!”

VP of Global Research Danielle Merfeld offered a similar but separate perspective on where General Electric is going:

“We are not layering digital on top of our physical world, and not replacing our physical world with a digital understanding of it, but actually combining the digital plus the physical to get more than a sum of the parts we could get with background or expertise with either one.”

It’s an encouraging insight as to what its business customers are actually looking for. Lots of technology is impressive, but not all technology is useful.

Predix Is the Centerpiece

It’s a little difficult to describe simply because it’s so overarching, but any business process or function that can be quantified or objectified can be improved by plugging it into General Electric’s Predix platform.

As was pointed out (by yours truly) back in February of last year, the company touts Predix as “the foundation for all of GE’s Industrial Internet applications, providing powerful, consistent, secure, and scalable support for the solutions you rely on to optimize your business.”

It sounds — or sounded at the time anyway — almost too big in scope to believe customers could even understand how to embrace the idea. As it turns out though, the world was more ready for Predix than most anyone may have realized. See, GE believes Predix will drive $6 billion worth of revenue this year.

For perspective, GE’s top line for all of last year was $123.7 billion; Predix is clearly only a drop in the bucket … for now. It’s not even broken out as a separate accounting category within the company’s books. Instead, any Predix-specific revenue is counted toward the business segment that sells the platform and its capabilities to its customers. It’s there though, and it’s making a difference. Six billion dollars is a lot of money when it’s a product that for all intents and purposes is still ahead of its time.

The real upside of Predix to General Electric and GE stock, however, isn’t the $6 billion worth of sales the software-as-a-service could tangibly drive for the company in 2017. The real upside is the sales of the billions and billions worth of hardware and services General Electric could deliver simply because it works seamlessly with the efficiency creating software.

Bottom Line for GE Stock

Numbers-wise, General Electric is still less than impressive, and miles away from its glory days while Jack Welch was at the helm. Many investors have put GE stock on the shelf with plans to keep it there indefinitely. It’s time to dust it off though, and Predix is the reason. The software/platform has revolutionized industry.

Whether General Electric knew it was going to happen, or just got lucky with its effort, isn’t clear. Doesn’t matter. Current and would-be owners just need to know the company has transitioned from an industrial name to a technology name that specializes in industry. Looking at GE through that lens casts a whole new bullish light on its future. This is the year the rest of the market could start to figure it out.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/general-electric-company-ge-stock-tech-play/.

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