Applied Digital’s AI Data Center Expansion
Applied Digital is experiencing rapid growth in its AI data center operations.
The company has secured $16 billion in leases projected over the next 15 years.
However, its stock price is considerably high, and the forthcoming spinoff related to its cloud business may impact reported revenue.
The stock price for Applied Digital (NASDAQ: APLD) has soared over 270% in the past year. Its data center, focused on Artificial Intelligence (AI), has surprised the market with its swift expansion, considering a recent lease agreement with CoreWeave, a cloud business spinoff. Additionally, there’s talk of converting into a real estate investment trust (REIT).
The question now is whether Applied Digital can keep its upward momentum and continue growing in the next year. Evaluating its business model, immediate drivers, and some potential hurdles can provide a clearer picture.
Applied Digital is involved in building and purchasing large data centers, ensuring they have sufficient power, and leasing those facilities to companies that want to set up their own servers. Initially, it focused its efforts on crypto miners and other blockchain firms but pivoted in 2022 towards AI, high-performance computing, and cloud services.
Interestingly, this approach resembles a real estate model more than that of a typical tech company. Yet, in 2023, it launched a new subsidiary, Sai Computing, to provide its own AI cloud services using Nvidia’s latest GPU technology. This new branch has grown at a much faster rate than the traditional data center hosting side. Still, it poses a challenge as it competes with some of its major customers, like Amazon and Microsoft.
The financial model for Applied Digital also includes plans to transition into a REIT, which requires paying out at least 90% of taxable income as dividends. This approach might conflict with the cash-intensive nature of the AI business.
As a response, Applied Digital has opted to spin off Sai into a new entity called ChronoScale, which will operate independently from its core data center business. Applied Digital will retain a 97% stake in ChronoScale.
Looking at revenue growth, Applied Digital’s figures jumped from $8.5 million in fiscal 2022 to $144.2 million by fiscal 2025, not considering the cloud segment. By the end of fiscal 2025, the company will operate two centers in North Dakota, totaling a capacity of 286 MW.
Nonetheless, the company’s net loss has grown significantly, from $23.5 million in fiscal 2022 to $233.7 million in 2025, as expansion efforts continued with new purchases and customer service demands.
At the Ellendale site, the Polaris Forge 1 campus is being enhanced, having added a new 100MW AI data center last November, with plans for an additional 150MW structure this year and another of the same size in planning. Hence, capacity might more than double soon.
There’s significant demand for these upcoming data centers, underpinned by contracts worth approximately $16 billion for leases over the next 15 years. CoreWeave will initially tap into 250 MW of this capacity, potentially expanding to 400 MW later on.
However, current market estimates for Applied Digital are not particularly reliable. They still include the cloud business, and it’s expected that analysts will revise their projections following the ChronoScale merger, which is anticipated in the first half of 2026. For fiscal 2026, revenue is forecasted to climb by 38% to $297.3 million, with a net loss expected to decrease to $91.1 million. Given the company’s valuation of $7 billion, this is seen as steep, considering it equates to 24 times this year’s sales.
If we distribute the $16 billion in leases over the 15 years, there’s a possibility of surpassing $1 billion in annual revenue after the expansion. But achieving this revenue level seems a couple of years away. Also, without profits, aspirations to become a consistent REIT may take longer.
While Applied Digital is seeing rapid growth, the spinoff of ChronoScale and increasing expansion costs might pressure its valuation in the short term. Unlike established players like Digital Realty Trust and Equinix, it isn’t in a position to offer stable income yet.
While there’s potential for Applied Digital’s stock price to see some rise as the AI boom continues, it’s probably unrealistic to expect a repeat of last year’s meteoric gains. Analysts might adjust their short-term forecasts once the spinoff occurs, suggesting a wait-and-see approach might be wise before investing further in this upward-trending stock.
