Caterpillar stock faces a major risk of a reversal amid valuation risks

Caterpillar stock price has pulled back in the past few days, moving from the year-to-date high of $947 on June 4 to the current $856. This retreat happened after it formed the risky double-top pattern on the daily chart. 

Valuation concerns remain amid the AI boom 

Caterpillar, a top industrial company known for making large machines for the construction and mining industries, has become one of the top gainers in the United States in the past few years. Its stock has jumped by over 300% in the last five years, bringing its market capitalization to nearly $400 billion.

This growth happened because of its positioning in the artificial intelligence industry, where it has become a key provider of power solutions to data centers. This trend will continue in the coming years as companies continue launching more data centers in the United States and other countries.

The data center business has made it a growth company. Its most recent numbers showed that its total sales rose by 22% in the last quarter to $7 billion. Its profit jumped to $1.45 billion, even after the tariff impact.

The company’s construction business also continued growing, moving to $7.2 billion from $5.2 billion in the same period a year earlier. Like the data center business, this segment made over $1.53 billion in profit, up from $1 billion a year earlier. The management pointed to the rising sales and pricing.

The resource segment was its worst performer, with its sales rising modestly to $3.8 billion and its segment profit tumbling by 39% to $378 million. It blamed the profit dip to Donald Trump’s tariffs and higher manufacturing costs. 

Caterpillar’s financial segment also experienced higher revenues. The management believes that the growth trajectory will continue in the coming years. At the same time, it continued returning cash to shareholders through a combination of dividends and buybacks. It returned $5.7 billion in the first quarter.

Growth to continue, but valuation concerns remain

Wall Street analysts are optimistic that the company’s growth will be steady over time. The average estimate is that its revenue will grow by 12.45% this year, followed by 10% in the following year. 

Still, the main concern is that Caterpillar has become highly overvalued. Its forward price-to-earnings (PE) ratio has jumped to 38, twice its five-year average. Also, the forward PEG ratio of 2.12 is higher than the sector average of 1.69 and the five-year average of 1.78. 

These numbers are much higher than those of some of the fastest-growing companies in the United States. For example, Nvidia has a forward price-to-earnings ratio of 23 despite its strong growth momentum. 

Caterpillar stock price technical analysis

CAT stock chart | Source: TradingView

The daily chart shows that the CAT stock price has pulled back in the past few days, mirroring the performance of the broader equity market. This retreat happened after it formed a double-top pattern at $930 and a neckline at $846. A double-top is a common bearish reversal sign in technical analysis.

This pattern has a height of $85. Subtracting this height from the neckline of $846 gives a target price of $760, which is about 10% below the current level.