We came across a bullish thesis on Power Solutions International, Inc. (PSIX) on Substack by LongTermValue Research. In this article, we will summarize the bulls’ thesis on PSIX. Power Solutions International, Inc. (PSIX)’s share was trading at $25.92 as of April 1st. PSIX’s trailing P/E was 8.61 according to Yahoo Finance.
A generator being fueled and readied for use as part of an end-to-end green hydrogen ecosystem.
Power Solutions International (PSIX) is a manufacturer of engines and power systems, with a strategic pivot toward the high-growth datacenter power generation market. As a 51%-owned subsidiary of Weichai Power, PSIX has historically operated in various industrial segments but is now focusing its manufacturing capacity on backup power solutions for AI-driven datacenters. This transition is reshaping the company’s financial profile, driving significant revenue growth and margin expansion. The power systems segment, which includes natural gas and diesel-powered electric generators, has surged from 49% of sales in 2023 to 68% in 2024, with a remarkable 62% year-over-year growth in Q4. AI datacenters, requiring uninterrupted power for peak computing demands, present a massive and long-term opportunity. In response to this demand, PSIX has been expanding its production capacity, breaking ground on a 100,000-square-foot manufacturing expansion in Darien, WI.
The broader datacenter buildout trend is expected to sustain robust growth, with hyperscalers projected to increase capital expenditures by over 40% in 2025. This surge underscores the urgency for reliable power generation solutions, and PSIX’s new product lineup—including a 22-liter natural gas engine and generator enclosures capable of housing 5MW of power—positions the company as a prime beneficiary. Despite this momentum, PSIX remains significantly undervalued, trading at just 6.0x its 2025 earnings estimates, well below peers like Caterpillar (CAT) and Cummins (CMI), which trade at 9-15x P/E. This valuation disconnect provides a compelling investment opportunity, particularly as PSIX transitions from a traditional industrial company into a specialized, high-growth datacenter power supplier.
Management has been proactive in optimizing the company’s financial position. Recent catalysts include refinancing its credit agreement at a lower interest rate, up-listing to NASDAQ, and paying down ~$35 million in debt, with expectations to reduce net debt to a mere 0.25x EBITDA by August 2025. With an anticipated $90 million in free cash flow for 2025, PSIX could soon initiate share buybacks or dividends, further enhancing shareholder returns. The transition to a higher-margin business is evident, with gross margins expanding from 9% in 2021 to 30% in 2024. As power generation surpasses 80% of revenue by 2027, EBITDA margins are projected to reach 25%, driving a substantial valuation re-rating.
Despite its strong fundamentals, risks remain. Weichai, as the majority owner, could pursue an unfavorable transaction that disadvantages minority shareholders. Additionally, any unexpected pullback in datacenter spending, supply chain disruptions, or heightened competition from incumbents like CMI and CAT could impact PSIX’s trajectory. However, given the company’s robust financial transformation, accelerating growth, and attractive valuation, PSIX presents a highly asymmetric risk/reward opportunity. A conservative 10x P/E multiple on 2026 earnings supports a $55 price target, representing significant upside as investors recognize PSIX as a key enabler of AI datacenter infrastructure.
Power Solutions International, Inc. (PSIX) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 7 hedge fund portfolios held PSIX at the end of the fourth quarter which was 0 in the previous quarter. While we acknowledge the risk and potential of PSIX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PSIX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.