Key Takeaways
-
Applied Digital is seeing notable revenue growth as it shifts its business model.
-
Speculation around an announcement of further commitments has fueled the stock’s upward movement.
-
Despite the growth, the business requires substantial capital investment, making facility construction expensive.
Applied Digital (NASDAQ:APLD) has witnessed a significant increase in its stock price after reporting impressive revenue figures for the quarter. The company is reportedly engaged in advanced discussions with hyperscalers regarding 900 megawatts of data center capacity.
As of now, the stock has surged around 250% over the past year. Let’s take a deeper dive into what Applied Digital is doing and whether it’s still a good time to invest.
Noteworthy Sales Growth in Q2
Applied Digital is making significant progress, particularly in the realm of artificial intelligence (AI). The firm operates more as a real estate entity than a traditional tech company. Interestingly, it’s in the process of transitioning its focus.
Applied Digital develops and manages data centers specifically designed for AI workload requirements, such as training large language models and inference. Its unique ability to access affordable electricity gives it a competitive edge. Additionally, the company maintains a data center hosting division catering to cryptocurrency mining, which is crucial given the current power access challenges in the AI infrastructure sector. This advantage is driving the firm’s remarkable growth.
In its fiscal second quarter, Applied Digital reported revenue growth of 250%, amounting to $126.6 million. Notably, its high-performance computing (HPC) segment contributed $85 million, with $73 million arising from tenant accommodation services for major clients. The setup is still developing, but it sets the groundwork for future revenue growth.
The data center hosting segment showed a 15% revenue increase, reaching $41.6 million, and operating income was logged at $16 million. This segment consists of facilities in North Dakota using 286 megawatts of power for cryptocurrency mining.
In terms of profitability, the company reported an adjusted net income of $100,000, maintaining a flat adjusted earnings per share (EPS). Adjusted EBITDA stood at $20.2 million, a sharp rise from $6.1 million a year prior.
At the close of the quarter, Applied Digital boasted $1.9 billion in cash, compared to $2.6 billion in debt. The operating cash flow was recorded at minus $97.9 million.
Is it Still a Good Time to Buy?
Applied Digital has relayed solid results, creating excitement among investors, particularly because it’s negotiating with several large cloud providers for a substantial power supply of 900 megawatts across two or three facilities.
Currently, the HPC business uses only 100 megawatts, as the first building on the Polaris Forge 1 campus has been finalized. Plans to expand to 400 megawatts by 2027 are already underway, and a commitment of 200 megawatts has been secured from another customer at the upcoming Polaris Forge 2 site, with some early capacity expected to go live soon.
These developments could usher in substantial growth, and the company appears to have the required funds to complete them. The important factor will be proving solid earnings from these enhancements. If successful, it could allow stock prices to soar.
Still, it’s worth noting that the expenses tied to data center construction and the current cash flow scenario place the stock in a high-risk, high-reward category. Given the stock’s impressive rise over the past year, cautious investing would be wise.
Final Thoughts on Investing in Applied Digital
Before deciding to purchase Applied Digital stock, here are some considerations:
According to analysts from Motley Fool Stock Advisor, there are ten stocks currently deemed more promising, ones that could yield impressive returns over the next few years.
For instance, if an investor put in $1,000 back in December 2004 into Netflix, they would have seen their investment balloon to $482,451 by now. Similarly, investing in Nvidia in 2005 would have transformed a $1,000 investment into $1,133,229.
It’s crucial to recognize that Stock Advisor has average returns of 968%, a striking contrast to the S&P 500’s 197%. Joining this investor community might be a good opportunity for retail investors.
