What you're reading: We built Luniter because we love science and want to know what's coming next, and which companies are actually building it. We track 200 of them. Every Monday we pick the one story from that world we think is worth your time and explain it in plain English. It takes about ten minutes. If you're new here, welcome.

Part II of III: The Hyperscaler Bill

Last Monday we added up the bill for the AI buildout: the biggest cloud companies are spending about two billion dollars a day on data centers. We also mapped where each of those dollars lands. About 67 cents buys the chips. The next biggest slice, about 18 cents, is electrical work: substations, switchgear, transformers, backup generators, and miles of wire. Against this year's bill, that slice alone comes to about 130 billion dollars. This week is about the companies doing that work, the electricians, and why two of their stocks just moved in opposite directions on the same news.

Start with the companies writing the checks. Alphabet spent more cash last quarter than its business brought in. Accountants call that negative free cash flow, and it was Alphabet's first negative free-cash-flow quarter as a public company. The chart below shows every quarter for twenty years. There is one red bar.

One red quarter does not mean Alphabet is in trouble. It means the company is spending as fast as the money comes in, and it is not alone. Over the past twelve months, Microsoft, Alphabet, and Amazon together brought in about 530 billion dollars of cash from their operations and put about 421 billion of it straight back into data centers and equipment. About 109 billion was left. Of the five big spenders from Part I, only Microsoft's management has explicitly committed to keeping free cash flow positive next fiscal year.

A large share of those checks is addressed to the electricians.

A backlog is work a company has been hired to do but has not done yet. For a construction or equipment company, it is the order book: the pile of future projects customers have asked for. When an electrician of this size says it has a 10 billion dollar backlog, it is saying: we already have 10 billion dollars of work lined up.

Investors watch backlog closely because today's order book is tomorrow's revenue.

But there is a catch, and it is the story this week. Backlog is not an official accounting term. There is no rulebook. Each company decides for itself what counts as being "hired." A signed contract with money behind it? A reservation for a factory slot? Different companies count different things, so the same word can describe something close to money in the bank, or something closer to a hope.

Two of the electricians reported earnings in the past two weeks. Quanta Services, which builds power lines and grid equipment, announced the biggest order book in its history. Its stock rose 17.3 percent that day. Sterling Infrastructure, which builds the sites data centers stand on, also announced the biggest order book in its history. Its stock fell 11.4 percent the next trading day.

If you expected a simple rule, record order book means the stock goes up, last week broke it. The market has started treating the word backlog as a question rather than an answer: what exactly is inside the number? The clearest way to see the question is to line up how each company answers it.

We sorted seven of the electricians and their suppliers by how strictly they define backlog, from strictest at the top to loosest at the bottom. The ladder ranks definitions, not businesses. The strictest definition belongs to Tetra Tech, an engineering firm, and it is three words long:

In plain English: the work is signed, the money is set aside, and someone has said go. Nothing else makes it into the number.

EMCOR, which wires the buildings themselves, reports the official accounting version of an order book, called remaining performance obligations: only signed contracts count. It stands at 17 billion dollars, up 44 percent in a year, and the company expects roughly three quarters of it to turn into revenue within twelve months.

Quanta reports two numbers side by side: the official accounting version, and a broader backlog that adds work it expects from ongoing customer relationships. The broader number is nearly 60 percent larger. Both are honest; only one is limited to signed contracts.

Sterling also keeps two books: signed contracts, and a combined number that adds projects it has been awarded but has not signed yet.

GE Vernova, which makes the gas turbines these projects wait in line for, counts 116 gigawatts of demand, but splits it honestly: some is equipment customers have bought, and more than half is factory slots customers have reserved.

Vertiv, which makes the power and cooling gear inside data centers, used to publish a strict backlog number, counting only legally binding purchase orders. This year it stopped publishing the number at all. Investors shrugged: the stock rose almost 13 percent last week anyway.

Eaton, which makes electrical components, sits at the bottom. Its earnings releases do not include a backlog figure; the number only appears deeper in its quarterly filing. That backlog is still growing 43 percent a year, though that is the first time its growth has slowed in five quarters, and the stock ended the week at its 52-week high. Of the seven companies on this ladder, Eaton's setup scores lowest in our system, and it ranks 153rd of the 200 companies we track.

Here is the part that ties it together. A backlog only becomes revenue when the work actually happens. If a project slips a year, the sale is not lost, but this year's revenue is, and these stocks are priced on this year's growth. For a company trading at a premium because its order book doubled, "late" can look a lot like "missing" when earnings come out.

And right now, late is the norm. Goldman Sachs's research team expects only about 60 percent of the data-center capacity scheduled for the next year to arrive on time, and only about half of what is scheduled over the next two years. The equipment is a big reason: the biggest power transformers now take about two and a half years to deliver, by Wood Mackenzie's count, so a site can be finished except for the one piece that makes it work. Permits are another: in July, New York paused state environmental permits for a year on data centers drawing 50 megawatts or more. Two weeks later, EMCOR's chief executive called the ban "sort of laughable" on his earnings call, saying nothing much is happening with data centers in New York anyway.

This is where the ladder earns its keep. A strict backlog can pay late, but it is real work with real money behind it. A loose backlog can do something worse: quietly shrink, because reservations can be canceled and intentions can change. When these companies report again in the fall, the question will not be whether the demand is real. It will be whether the work happened on schedule, and whose numbers were counting things that never happen at all.

Part I closed with Sterling reporting its earnings that evening. Sterling earned $5.80 a share, adjusted, against the $5.20 analysts expected. Revenue rose 90 percent. Management raised its guidance for the year, and both of its backlog books set records: signed contracts up 116 percent from a year ago, the combined book up 150 percent, with more than 92 percent of the signed work in its site-development business serving data centers, chip plants, and large factories. The stock fell anyway; that is the red bar in the chart above.

By the end of the week, with Sterling's new numbers in our scoring system, its growth score stood higher than before the report. The market and the scores are reading the same quarter in opposite directions. Both readings are on the card below.

Scorecard — Sterling Infrastructure (STRL)

The picture in one line: one of the fastest growth readings among the 200 companies we track, on a stock the market has marked down by nearly half from its high.

Alongside the scores we run the Opinionated Machinery, a rules-based, fully simulated portfolio system, published in the open. It made no trades this week. After selling four AI-infrastructure suppliers on its cool-down rule two weeks ago, it sat still, even as our published gauge for that theme warmed 17 points.

The companies paying for the buildout are keeping less of their cash than they used to. The electricians they are paying hold record order books. And the market has stopped taking those order books at face value: it has started asking which ones are signed contracts, which ones are hopes, and which ones will pay late.

One company gets the last word. Tetra Tech, the company with the strictest definition on the ladder, just told investors that commercial orders for data center and sediment restoration projects drove its backlog up by more than 200 million dollars. Sediment restoration is water work. Next Monday the series closes with water: the slice of the buildout almost nobody has billed yet.

Anthony

The Luniter Observatory