Can Data Center Demand Keep Driving Sterling's Margins in 2025?

Sterling Infrastructure's (STRL) Q1 2025 results showed strong growth in its E-Infrastructure segment, with revenues up 18% year-over-year driven by data-center demand, which now represents over 65% of the segment's backlog; this surge in data-center projects expanded adjusted operating margins by 618 bps to 23%. The company's total backlog reached $2.1 billion with a gross margin of 17.7%, up from 16.7% at the end of 2024, and STRL expects continued strength in data-center demand as customers pursue multiyear capital deployments. Competitors like Jacobs Solutions and Dycom Industries are also positioned to benefit from this expanding market.

Analysis

Sterling Infrastructure, Inc. (STRL) demonstrated robust performance in its E-Infrastructure segment during Q1 2025, with revenues increasing 18% year-over-year, primarily propelled by a roughly 60% expansion in data center-related activities. This surge has led to data-center projects constituting over 65% of the E-Infrastructure segment's backlog and significantly boosted its adjusted operating margins by 618 basis points year-over-year to 23%. The company's total backlog stood at $2.1 billion at quarter-end, with an improved gross margin of 17.7%, up 100 basis points from the end of 2024, largely due to the growth in higher-margin E-Infrastructure projects, which account for $1.2 billion (or 57%) of the total backlog. STRL anticipates sustained strong demand from the data-center market, supported by multiyear capital deployment plans from customers. This positive outlook is reflected in its stock performance, which has risen 12.4% in the past month, outperforming the Zacks Engineering - R and D Services industry's 6.8% gain. However, STRL trades at a premium price-to-earnings ratio of 23.21X compared to the industry average of 20.43X. Zacks Consensus Estimates project year-over-year earnings per share growth of 38.5% for 2025 and 11.6% for 2026. The broader data center construction trend is also benefiting competitors like Jacobs Solutions Inc. and Dycom Industries, Inc., indicating a strong sector-wide tailwind.

Key Decisions for Investors

• Investors should consider STRL's strong positioning to capitalize on sustained data-center demand, which is driving significant revenue growth and margin expansion in its E-Infrastructure segment.
• Evaluate whether STRL's projected earnings growth (38.5% for 2025 and 11.6% for 2026) and robust backlog justify its current premium P/E ratio of 23.21X relative to the industry.
• Monitor the company's execution on its $2.1 billion backlog, particularly the conversion of high-margin E-Infrastructure projects, and watch for continued strength in backlog gross margins as key indicators of sustained profitability.