The digital revolution is alive and well! Not only are more and more startups coming onto the scene, providing everything from yoga instruction to language lessons, large companies like General Electric (NYSE:GE) are taking part as well, utilizing their large footprints to capture additional customers and sales. In particular, General Electric began, in 2015, a new line of business known today as GE Digital, a set of businesses geared not only toward its industrial business, but also set up with the intention of providing niche services to third parties. At a time when other aspects of General Electric are suffering, Digital is thriving, growing sales and backlog, and setting the stage for continued value creation down the road. In time, this set of operations likely will represent an even more material (and maybe even the largest source of value besides perhaps the company’s Aviation segment) part of General Electric.
A look at GE Digital
Unlike operating segments like Aviation, Power, and Transportation, GE Digital, or just Digital for short, is not an independent segment of General Electric. Instead, it’s a set of revenue streams and related operations that weave between the rest of the conglomerate’s businesses. Take, for instance, its role in the company’s Oil & Gas business. According to management, digital solutions involve the sale of equipment and services, such as sensor-based measurement tools, turbine services, plant controls, condition monitoring services, and pipeline integrity solutions for energy (and non-energy) providers.
In General Electric’s Healthcare segment, Digital provides software, analytics, and cloud-based services, while in the company’s Aviation segment it works on flight analytics, advanced manufacturing, and more. The list here goes on. In an effort to spur on growth for Digital, in the five months ending January of 2017, management allocated an impressive $1.5 billion toward acquisitions dedicated to this line of business. The largest chunk during this period was the $0.9 billion management doled out for ServiceMax, a company that General Electric cited as a “leader” in cloud-based field service management.
*Taken from General Electric
All of these are great, but one of the most relevant and interesting parts of Digital is General Electric’s Predix platform. In the image above, you can see how management has visualized Predix compared to other providers that it refers to as Infrastructure-as-a-Service players. Like these firms, Digital’s Predix platform offers customers the power of the cloud, ranging from network to data storage services, and more, but as the image shows, it offers an entirely different array of services as well.
According to management, Digital addresses an area that it calls Middleware / Platform layer. This includes, but is not limited to, application services largely dedicated to the industrial space. By taking in data onto its platform, ranging from financial data to operational figures associated with entire plants, Predix is able to model out various hypothetical scenarios. With machine learning in place, this process is intensified. However, Predix is far more complex than the image shows.
Right now, there exist three variations of the Predix platform. The first is what management calls its Predix ServiceMax, which provides field service management that utilizes customer and asset data in order to improve operations. One example is the service using predictive analytics to not just quickly correct issues that could cause downtime in customer-service functions, but to also prevent that same downtime before it occurs. In its Predix Asset Performance Management line, the company uses asset data to create actionable insight for customers looking to optimize their existing resources.
And the third variation promoted by management is its Predix Operations Performance Management services. As opposed to broader assets or customer data, this line of business helps to manage and optimize plants, sites, and other operational assets owned by companies. Under this third line, management touted the success it had working with Lonmin, a platinum metals producer, in looking at where assets were being treated suboptimally. Following Predix’s assessment, Lonmin was able to increase its own smelter throughput by around 10%.
GE Digital is growing rapidly
Over the past year especially, it’s no secret that General Electric has been a major let-down for many of its shareholders. Due to poor performance, fears regarding its Power segment, and billions of dollars worth of costs that have come out of nowhere, shares of the conglomerate are down nearly 53% from their 52-week high. Investors should be happy to know, then, that not everything is going poorly. Digital, in fact, is not only surviving during this downturn, it’s thriving.
*Created by Author
In the graph above, you can see revenue reported for Digital over the past three years (earlier figures have never been provided since management only started thinking about Digital as a business in 2015). In 2015, sales totaled $3.1 billion. That number has soared, rising by $0.9 billion (or 13.6% per annum) to $4 billion by 2017. According to my math, last year approximately $2.41 billion (or 60.3%) worth of these sales came from the company’s Oil & Gas segment, while $1.15 billion (or 28.8%) came from the business’ Healthcare operations. We do know that Digital has its hands in Aviation, Power, Renewable Energy, and Transportation as well, but the extent of it has not been revealed. In all, though, these different segments must account for no more than 11% of Digital’s sales. In addition, in the first quarter of this year, revenue for Digital totaled $1 billion, an increase of $0.1 billion from the same quarter last year.
*Created by Author
Not only are we seeing sales increase, we’re also seeing evidence that continued growth is around the corner. In the graph above, you can see orders put in for Digital, which between 2015 and 2017 grew by 25.5% per annum from $3.3 billion to $5.2 billion. One interesting indicator is likely to be the ratio of orders to revenue, because it illustrates (assuming no cancellations) the rate at which backlog for Digital should be expanding. In the graph below, you can see that this figure has grown from 1.06 in 2015 to 1.30 in 2017. In the first quarter for 2018, orders were just $0.9 billion, which matched last year’s first quarter, but seasonal and other fluctuations could be contributors to this.
*Created by Author
I’ll be the first person to admit that General Electric has a lot of work ahead for it if it wants to remain relevant in this day and age. The conglomerate’s financial issues need to be resolved, but just because these issues exist does not mean that investors should ignore the firm or the prospects it offers. Based on the figures I collected, and based on my understanding of General Electric’s Digital business, I believe that as this set of operations expands, the firm’s value, keeping all else the same, could grow significantly. Strong revenue growth, impressive orders, and the likely strong margins that accompany any sort of service-oriented revenue could be setting the stage for great value creation down the road if the firm can come away from its other troubles intact.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.