Applied Digital Corporation’s Shares Surge Despite Financial Losses

Applied Digital Corporation (APLD) shares rose by 69.4% over the past month after a decline until mid-April. This prior decrease stemmed from industry-specific headwinds, as major hyperscalers began canceling leases in the first quarter of 2025. However, recent earnings reports from companies like Microsoft (MSFT) and Meta Platforms (META) indicate a rebound in demand for hyperscale, colocation, and AI workloads, despite ongoing macroeconomic uncertainty.

APLD’s share price surpasses the broader Finance sector growth of 2.6% and the S&P 500 Index’s 4.4% increase. This outperformance reflects investor confidence amid planned major capital expenditures by hyperscalers.

Quarterly Financial Performance

Applied Digital reported a loss of 16 cents per share for the first quarter, down from earnings of 52 cents a year ago, despite strong sales growth. The drop resulted mainly from increased depreciation and amortization expenses linked to the company’s substantial investment in data center infrastructure.

The recent surge in APLD stock may tempt investors to consider adding it to their portfolios. An analysis of the company’s strengths and weaknesses will help determine the best investment strategy.

Factors Supporting APLD’s Growth

AI Demand Outpacing Supply: Major investments in AI services from Microsoft ($80 billion) and Meta ($62.5 billion) signal strong future demand for AI-focused data centers. Despite a 7% year-over-year decline in Data Center Hosting sales in Q1, the rising demand may help APLD land its first hyperscaler client at the Ellendale facility, enhancing future revenue.

APLD’s Expansion Plans: Applied Digital is focused on developing its High-Performance Computing (HPC) infrastructure. The company has invested nearly $1 billion in assets over the past year, primarily to expand data centers. Currently, APLD operates 286 megawatts of contracted data center hosting capacity, mainly for Bitcoin miners. Plans are underway to increase total capacity by 700 megawatts by 2027.

Financial Backing: APLD secured a $150 million equity facility, allowing it to raise funds in increments over 36 months to support HPC expansion. Following significant cash burn due to high capital expenditures, the company ended Q1 with $100 million, down from $308 million in the previous quarter. The new facility, in partnership with Macquarie Asset Management and Sumitomo Mitsui Bank Corporation, is expected to bolster ongoing expansion efforts.

Short-Term Challenges Ahead

APLD faces increased costs, primarily from depreciation due to new facilities, which may strain short-term profit margins. Seasonal fluctuations in power costs also impacted margins in the Data Center Hosting segment during Q1. Although overall revenues improved, they fell short of estimates, largely due to a 35.7% sequential decline in Cloud Services revenues caused by challenges shifting from single-tenant to multi-tenant contracts. Currently, four of APLD’s six GPU clusters are on reserve contracts, with plans to transition them to an on-demand model.

Looking forward, depreciation costs may remain high as the company plans to invest $30-$50 million monthly for infrastructure improvements over the next 12-18 months. While these expenditures are expected to generate revenue as new facilities become operational, APLD has yet to secure customers for its increased capacity. The 400-megawatt Ellendale campus is projected to launch in 2025, but revenue-generating leases are critical for mitigating gross margin impacts.

Valuation Assessment

Currently, APLD stock trades at a premium, indicated by a Value Score of F. Following the recent surge, APLD has a forward 12-month price-to-sales (P/S) ratio of 7.02X, compared to the industry average of 3.48X. Additionally, this valuation is considerably higher than its five-year median of 1.8X.

Conclusion: Hold APLD Shares

Despite the recent surge in APLD’s share price, its elevated valuation makes it a less attractive investment currently. While the company’s outlook remains positive amid macro headwinds, it may take time for these factors to reflect in earnings. Margins are likely to remain pressured in the interim. APLD currently holds a Zacks Rank of #3 (Hold) and a Style Score of D. Given these considerations, investors should refrain from purchasing at this moment and consider waiting for a pullback. Existing investors, however, may wish to retain their shares.