Applied Digital (NASDAQ:APLD) It has become one of the fastest growing stocks on the market in recent years. After the data center operator shifted from focusing on providing infrastructure for crypto miners to building infrastructure to support artificial intelligence (AI), its stock price has completely skyrocketed.
But while the AI-first strategy has created a huge opportunity, the company is walking a fine line and any slip-up could turn this growth stock into dead weight in your portfolio.
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Applied Digital builds and operates data centers designed specifically for AI workloads and rents the facilities to tenants who actually run the servers that power the AI. Think of it like a specialized real estate developer and owner: you find the land, build the facilities, and keep the lights on and the air conditioning running.
Given the immense power requirements of AI and the complexity of the infrastructure that supports it, there are only a handful of companies capable of doing it at scale. That means Applied Digital is extremely well positioned to take advantage of the rapid growth of AI to expand its top line, and it has done just that.
The company’s revenue has skyrocketed from $55 million in 2023 to $264 million over the last four reported quarters. Applied Digital is building an immense amount of capacity and now has commitments for up to $16 billion in revenue over the next 15 years.
While there are many opportunities in this niche, there are also many risks. The company is currently operating in the red, losing $125 million in the last 12 months. But that’s not necessarily a major concern right now; There is a clear path to profitability in the coming years.
The real problems are two: the immense debt that the company is assuming to boost its growth and its great dependence on its largest client.
Applied Digital had just over $42 million in book debt in the first quarter of 2024. As of Nov. 30, the end of its most recent fiscal quarter, that figure has risen to nearly $2.6 billion. And this is not cheap debt; Most of it is financed at an interest rate of 9.25%.
However, what worries me more is Applied Digital’s dependence on Core tissue. The neocloud operator is responsible for the vast majority of Applied Digital’s future rental revenue. While customer concentration to that degree would be a concern for any business, it is especially so when the key customer is unprofitable and relies on huge amounts of debt to fuel its growth, even more debt than Applied Digital. If at any time CoreWeave is unable to meet its payments, Applied Digital will find itself in a difficult situation.