GE Aerospace (NYSE:GE) stock has surged by nearly 40% this year, significantly outperforming the S&P 500, which is down 1%. This impressive rally raises a crucial question for investors: Is GE stock currently overvalued, and could it experience a significant correction, perhaps by 25-30% or even 40% to below $150?
Well, here’s the concern – at approximately $235 per share, GE stock appears expensive. It’s trading at nearly 60 times its free cash flow over the last twelve months. To put that in perspective, this translates to a paltry cash flow yield of about 1.7%. For context, Nvidia, a leader in the AI sector with over 80% average revenue growth in recent years, trades at a lower multiple of 50 times cash flow. GE’s revenue growth, at around 9%, while an improvement from 5% in recent years, is not enough to justify such a high multiple. What you pay, matters. We have constructed the Trefis High-Quality Portfolio with an eye toward relative valuation. Notably, HQ clocked >91% return since inception and outperformed S&P, Nasdaq, Dow — all of them.
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Why Is GE So Expensive?
GE’s current valuation stems from a significant restructuring that has refocused the company on high-growth commercial, military, and general aviation sectors. Following the spin-offs of its healthcare, renewable energy, and power businesses, GE Aerospace is now capitalizing on strong demand for its aftermarket services, including engine servicing and aircraft maintenance. This trend is expected to continue, bolstered by robust order inflows—$12.3 billion in Q1’25, up 12% year-over-year—and a massive backlog of $140 billion as of Q1.
Furthermore, GE has demonstrated substantial margin expansion. Its operating margin has soared from 12.3% in 2022 to 18.8% in the last twelve months, a remarkable 53% increase that the market has rewarded.
GE Aerospace also benefits from its dominant position in the large commercial engine market with only a handful of competitors including Rolls-Royce, Safran, Honeywell, and Pratt & Whitney. Its CFM56 and LEAP engines power a significant portion of the world’s commercial fleet, effectively locking airlines into decades of GE’s high-margin maintenance, parts, and service business. Switching engine providers is a complex and costly endeavor for airlines, solidifying GE’s revenue stream.
What’s Next for GE?
While GE’s revenue growth may remain in double digits, the rapid pace of margin expansion is unlikely to continue. Consequently, GE should be valued more in line with other companies achieving 10-15% revenue growth.
Even when compared to a company like Microsoft, which trades at around a 48 times free cash flow multiple and boasts 15% annual growth, GE’s current valuation seems stretched. At Microsoft’s multiple of 48x cash flow, GE’s stock price would be closer to $190 per share. Investors must consider if GE warrants an even lower multiple given its growth profile.
Why GE Might Still Be a Reasonable Investment
Despite the concerns about its high valuation, there are reasons why GE Aerospace could continue to perform well. Its performance is intrinsically linked to aviation volumes, encompassing commercial air travel, domestic flights, international routes, and cargo transport. A strengthening economy, potentially spurred by easing trade tensions and cooling inflation, could significantly boost business and leisure travel, and global trade.
Increased flight activity directly translates to higher demand for new aircraft and engines, enabling airlines to expand their fleets and replace aging planes. Importantly, more flight hours also mean greater demand for engine maintenance, parts replacement, and service revenue—GE’s most profitable business. Each additional hour an engine operates contributes directly to GE’s aftermarket revenue stream, as airlines increase utilization rates and flight frequencies.
Understanding Risk-Reward Through Comparison
Comparing GE with companies like Nvidia and Microsoft isn’t about finding direct equivalents, but rather about understanding the relative attractiveness and risk-reward trade-offs of an investment. When considering GE, investors should weigh its potential returns against alternatives like holding cash (earning interest) or investing in a broad market ETF like the S&P 500.
Using “anchor” assets like Nvidia and Microsoft, which also trade at high multiples, provides a critical perspective on the risk-reward profile of GE. These comparisons help investors assess whether the expected return on GE stock justifies the associated downside risk, especially given that these anchor stocks offer more compelling growth narratives. This analytical approach is crucial for making informed investment decisions.
No matter the trade-off, investing in a single stock can be risky. On the other hand, the Trefis High Quality (HQ) Portfolio, with a selection of 30 stocks, has demonstrated a history of comfortably outperforming the S&P 500 over the past 4-year span. What accounts for this? As a collective, HQ Portfolio stocks achieved superior returns with reduced risk compared to the standard index, with a smoother performance evident in HQ Portfolio performance metrics.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
