AI data center builders are experiencing significant growth.
Applied Digital‘s stock price has surged over 270% in the past year, which is quite impressive. The company has been making waves in the market with its swift growth and new leasing agreements. CoreWeave, a spinoff from its cloud operations, is also in the spotlight as it plans to transition to a real estate investment trust (REIT).
But can Applied Digital keep this momentum going into next year? Let’s examine the company’s business model, immediate drivers, and potential challenges to gain some clarity.
How is Applied Digital’s business model evolving?
Applied Digital specializes in constructing and acquiring large data centers, ensuring they have the necessary power, and then leasing them to firms that set up their own servers. Initially, their focus was on Bitcoin, targeting miners and blockchain companies. However, in 2022, they shifted towards the cloud, high-performance computing (HPC), and AI sectors.
Interestingly, this makes their business model resemble that of a real estate firm rather than a tech company. In 2023, they launched a new subsidiary, Sai Computing, to offer their own cloud-based AI services using the latest Nvidia GPUs.
Sai has been growing notably faster than the core data center hosting part of the business. Yet, it’s worth noting that the company hasn’t turned a profit and now finds itself competing against some key clients like Amazon and Microsoft. This focus on cash-burning operations seems to contradict the company’s goal of evolving into a stable REIT that just rents out data centers and shares rental income with investors. For REITs, there are also strict rules about distributing taxable income as dividends to retain favorable tax rates.
This led Applied Digital to recently decide to spin off Sai’s operations and merge with EKSO Bionics Holdings to form a new entity called ChronoScale. Applied Digital will maintain about 97% ownership of ChronoScale, which will operate separately from the core data center business.
What are the near-term catalysts for Applied Digital?
From fiscal year 2022 to 2025, Applied Digital’s revenue is projected to leap from $8.5 million to $144.2 million (excluding the cloud business). By the end of that period, the company expects to manage two data center sites in North Dakota with a total capacity of 286 MW.
However, losses have also ballooned, increasing from $23.5 million in fiscal 2022 to $233.7 million by fiscal 2025 due to the opening of a second data center and growing customer demand.
The expansion of their Polaris Forge 1 campus in Ellendale is underway. They completed a new 100MW AI/HPC data center last November and plan to finish another 150MW building soon, with even more plans on the drawing board. So, it’s safe to say the capacity is on track to more than double in the coming years.
There’s a strong demand for these new facilities, with approximately $16 billion in lease agreements already in place for the next 15 years. Notably, CoreWeave is expected to utilize 250 MW of Applied Digital’s capacity initially, with the possibility of expanding to 400 MW later.
However, Wall Street’s estimates for Applied Digital are a bit shaky right now, as they still factor in the cloud business. Analysts may revise their projections after the merger with ChronoScale wraps up in the first half of 2026. For fiscal 2026, before the deal is finalized, analysts anticipate a revenue increase of 38% to $297.3 million, alongside a narrower net loss of $91.1 million. Currently, the company is valued at $7 billion, which seems steep at 24 times this year’s sales.
If they can spread out those $16 billion in lease payments over the next 15 years, it’s possible for Applied Digital to generate more than $1 billion in annual revenue post-expansion. But that’s probably still a few years away. The continuing losses will also delay long-term aspirations to become a stable data center REIT like Digital Realty Trust or Equinix, which are profitable and offer reliable dividends.
What will Applied Digital’s stock price be in a year’s time?
While Applied Digital is growing quickly, the upcoming spinoff of ChronoScale, along with rising costs for data center expansions, might put a pinch on its valuation in the near term. Unlike established firms like Digital Realty or Equinix, it’s not yet a REIT generating steady income.
So, while there could be a modest increase in Applied Digital’s stock price over the next year as the AI sector grows, it seems unlikely to match the substantial gains from the previous year. Analysts might also downgrade their short-term expectations if the spin-off occurs. It might be sensible to wait a bit before diving into the stock market for this one.
