Applied Digital: Is The $16 Billion AI Bet Worth The Risk?
The company is building the infrastructure for the AI boom with billions in contracted revenue, but you’re buying into a costly construction project long before the profits arrive.
Applied Digital (APLD) is not a software company riding the artificial intelligence wave; it’s one of the companies pouring the concrete. It designs, builds, and operates the large, power-hungry data centers that AI models require. After a striking 228% run-up over the past year, the stock now trades about 37% below its 52-week high, raising a direct question for anyone looking at the opportunity today. Are you buying into the early stages of a dominant infrastructure provider for the AI age, or are you taking on the considerable risks of a company still in the middle of its expensive, complex build-out?
How Expensive Is It?
On the surface, Applied Digital’s valuation is a study in contrasts. The stock trades at a price-to-sales ratio of 32.0, a steep figure that dwarfs the S&P 500’s multiple of 3.3. That’s the kind of premium the market typically pays for extreme growth, and APLD has it: its revenue has grown at a 118% average annual rate over the last three years. But look at profitability, and the picture flips. The company is not yet profitable, with an operating margin of -23% compared to the market’s positive 18.4%. It’s also burning through cash to fund its expansion, so a price-to-free-cash-flow multiple isn’t meaningful. In short, you are paying a high price for today’s sales in the belief that the company’s large construction pipeline will eventually generate significant profits. The current losses are the cost of that future.
What Does That Price Buy, And Can It Fund Its Plans?
What you get for that price is a direct stake in the AI infrastructure build-out. The engine here is the HPC hosting business, which builds and leases specialized data centers. This segment generated $71 million of revenue in the most recent quarter. More importantly, the company has already secured approximately $16 billion in contracted lease revenue, providing a long-term view of potential income. Management sees demand from its “hyperscalers” clients as aggressive as they’ve ever seen it and is actively marketing four new development sites totaling roughly 1 gigawatt of power capacity. The critical question is whether it can fund this ambition. The company is burning cash, but it ended the last quarter with $2.1 billion in cash and equivalents. It has also arranged significant financing, including access to $4.1 billion in preferred equity from Macquarie Asset Management for future projects. While its debt load of 31% of its market value is higher than the market average of 20%, the company appears to have a clear financing model in place for its current construction.
When Markets Turn, And How This Stock Behaves
A look at history shows that holding this stock requires a strong stomach. During the 2022 inflation shock, APLD stock fell 83%, a far deeper drop than the S&P 500’s 25% decline. It was a similar story during the 2020 pandemic, when the stock fell 68% versus the market’s 34% drop. And in the 2008 global financial crisis, it plunged 92% while the S&P 500 fell 57%. In each case, the stock did eventually recover to its prior peak, but the drawdowns are severe. This is a high-beta stock that amplifies market downturns. The options market currently implies an expected volatility of 95, which, while lower than its recent past, still signals that traders are braced for significant price swings.
Where That Leaves You
The decision on Applied Digital hinges on your view of execution. The case for buying is that you are getting in on the ground floor of a tangible, long-term growth story fueled by the AI revolution. The company is building real assets backed by billions in contracts with major customers, and the financing for its current projects appears to be secured. If management delivers on its construction timeline, the earnings power could be immense.
The reason for caution is that you are buying a promise before it’s fully delivered. The company is unprofitable, and large-scale development carries major execution and regulatory risks, highlighted by its decision to withdraw a planned project in South Dakota following changes to local tax laws. The key thing to watch is the pace of new lease signings and construction progress. Success here would validate the growth story, while further delays could test investor patience.
Buy Or Fear, It Is Still One Stock
Whether the call here is greed or fear, the bigger exposure is the same: how much of your future rides on this single name. A position that has grown too large turns one bad stretch into real, lasting damage – and selling to cut it back hands a chunk to the IRS. There is a way to protect the position and diversify out tax-efficiently.