Sterling's Valuation Stretched Despite AI-Driven Backlog Growth and Margin Expansion

What happened

Sterling Infrastructure has demonstrated robust operational performance with a growing multi-year backlog and richer profit margins, supported by strong Q4'25 results and promising FY2026 guidance, reinforcing its status as an AI and data-center infrastructure beneficiary. However, the stock's euphoric rally has pushed forward P/E and EV/EBITDA multiples to 44.4x and 29.05x, far exceeding sector medians and historical averages, embedding aggressive growth expectations. DeepValue analysis corroborates these valuation risks, rating STRL as a 'POTENTIAL SELL' with a base case implied value of $340—below the current $372 price—due to dependencies on sustained high E-Infrastructure margins and AI capex cycles. A critical look at filings reveals that backlog growth includes acquired CEC contributions, and earnings rely on percentage-of-completion accounting, which is prone to revisions and concentrated project risks. Consequently, while fundamentals are strong, the current valuation offers limited upside and significant downside exposure if AI demand falters or margins compress.

Implication

Existing shareholders should consider trimming positions above the $420 trim level, as the high probability of multiple compression threatens returns if growth normalizes or AI cycles slow. New investors are advised to wait for a more attractive entry near $320 to improve risk-reward, given the base case value of $340 and bear case of $260. Key monitoring points include E-Infrastructure margins staying above 24% and book-to-burn ratios exceeding 1.0, with breaches potentially triggering downgrades and stock pressure. The stock's heavy reliance on AI and data-center capex means any slowdown in hyperscaler spending could directly impair earnings and justify valuation de-rating. Given crowded bullish sentiment and early stress signals, diversifying or hedging positions may help manage volatility and mitigate downside risks in this overvalued scenario.

Thesis delta

The DeepValue thesis remains unchanged, maintaining a 'POTENTIAL SELL' rating due to valuation risks and cyclical dependencies on AI capex. The news article reinforces this by highlighting the euphoric rally and expensive multiples, but no fundamental shift is identified; it merely underscores the urgency for investors to reassess positions given stretched valuations. However, if Sterling's margins or backlog conversion weaken, the thesis could downgrade further, emphasizing the need for vigilant monitoring of operational metrics.