Applied Digital now has lease agreements worth more than $16 billion over the next 15 years.
Its heavy reliance on a single customer adds significant risk to an already heavily leveraged business.
Applied Digital (NASDAQ: APLD) has turned into one of the market’s hottest growth stocks in recent years. After the data center operator pivoted from a focus on providing infrastructure for crypto miners to building infrastructure to support artificial intelligence (AI), its share price has absolutely exploded.
But while the AI-first strategy has created an enormous 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 specifically designed for AI workloads, and leases the facilities to tenants that actually run the servers that power AI. Think of it as a specialized real estate developer and landlord — it finds the land, builds the facilities, and keeps the lights on and the AC 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 this at scale. That means Applied Digital is extremely well positioned to take advantage of AI’s rapid growth to expand its top line — and it has.
The company’s revenue has exploded from $55 million in 2023 to $264 million over its last four reported quarters. Applied Digital is in the midst of building an immense amount of capacity and now has commitments for up to $16 billion in revenue over the next 15 years.
While there is a lot of opportunity in this niche, there’s also a whole lot of risk. At present, the company is operating in the red, losing $125 million over the last 12 months. But that’s not necessarily a major concern at this point; there is a clear path to profitability in the coming years.
The real problems are twofold: the immense debt the company is taking on to fuel its growth and its heavy reliance on its largest customer.
Image source: Getty Images.
Applied Digital had just over $42 million in debt on the books in Q1 2024. As of Nov. 30, the end of its last fiscal quarter, that figure has grown to nearly $2.6 billion. And this isn’t cheap debt; the bulk of it is financed at an interest rate of 9.25%.
More concerning to me, however, is Applied Digital’s reliance on CoreWeave. The neocloud operator is responsible for the vast majority of Applied Digital’s future lease income. While customer concentration to that degree would be a concern for any business, it’s especially so when the key customer is itself unprofitable and relying on enormous amounts of debt to fuel its growth — even more debt than Applied Digital. If at some point, CoreWeave cannot make good on its payments, Applied Digital will be in a tough spot.
Do I think Applied Digital actually will go to $0? Likely not, but it’s entirely possible — and the risk of a steep slide is too great for my comfort.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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