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Digital applied (NASDAQ: APLD) has become one of the stocks with the most growth in the market in recent years. After the data center operator switched from focusing 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 a huge opportunity, the company is walking a fine line, and any missteps 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 workloadsand rents the facilities to tenants who actually run the servers that power the AI. Think of it as a specialist real estate developer and owner: 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 this at scale. This means that Applied Digital is very well positioned to take advantage of the rapid growth of AI to expand its bottom line, and it has.
The company’s revenue has grown from $55 million in 2023 to $264 million over the past 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 is also a lot of risk. The company is currently operating in the red, losing $125 million over the past 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 twofold: the massive debt the company is taking on to fuel its growth, and the heavy reliance on its biggest customer.
Applied Digital had just over $42 million in debt on the books in the first quarter of 2024. As of Nov. 30, the end of its most recent fiscal quarter, that number has grown to nearly $2.6 billion. And this is not cheap debt; most of it is financed at an interest rate of 9.25%.
Of more concern to me, however, is the reliance on Applied Digital CoreWeave. The neocloud operator is responsible for the vast majority of Applied Digital’s future lease revenue. While customer concentration to this extent would be a concern for any company, 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 point CoreWeave can’t make good on its payments, Applied Digital will be in a tough spot.
