Applied Digital Shares Surge on Bright Outlook. Is It Too Late to Buy the Stock?

Applied Digital (NASDAQ: APLD) shares soared higher after the company reported another strong quarter of revenue growth and revealed that it was in advanced talks with multiple hyperscalers (owners of large data centers) for 900 megawatts of data center capacity.

The stock is up about 250% over the past year, as of this writing. Let's dig into what Applied Digital does, and whether or not it's too late to buy the stock.

Strong fiscal Q2 revenue growth

Applied Digital has been a big artificial intelligence (AI) infrastructure winner, but it is actually more of a specialized real estate company than it is a tech company. In fact, it recently announced it was spinning out its cloud computing business and merging it with EKSO Bionics Holding (NASDAQ: EKSO) to form a new company called ChronoScale. This business would sometimes come into conflict with its customers, and the company is also looking to convert into a real estate investment trust (REIT).

Applied Digital builds and runs data centers that are tailored for handling AI workloads, like training large language models and inference. The company has been able to carve out a strong niche in the space through its access and ability to source cheap power, which it gained when it was a Bitcoin miner. In fact, it still operates a data center hosting business that caters to the crypto mining space. Today, access to power is one of the biggest bottlenecks in the AI infrastructure space, which has helped drive strong growth for the company.

Applied Digital's rapid revenue growth continued in its fiscal second quarter, with revenue surging 250% to $126.6 million. The company's high-performance computing (HPC) business contributed revenue of $85 million, with $73 million of that coming from tenant fit-out services, which is revenue it gets from building out specialized facilities for large customers. This is still largely work being done for CoreWeave. Tenant fit-out services have low gross margins, but they set the stage for higher-margin recurring revenue growth in the future.

Its data center hosting business, meanwhile, grew its revenue by 15% to $41.6 million, with operating income of $16 million. This business consists of two facilities in North Dakota that use 286 megawatts of power for cryptocurrency mining.

On the profitability front, the company reported adjusted net income of $0.1 million and flat adjusted earnings per share (EPS). Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $20.2 million, compared to $6.1 million a year ago.

It ended the quarter with $1.9 billion in cash against $2.6 billion in debt on its balance sheet. It had operating cash flow of negative $97.9 million and negative free cash flow of $899.4 million through the first half of its fiscal year.

Image source: Getty Images.

Is it too late to buy the stock?

While Applied Digital turned in solid results, what got investors the most excited was its comments about being in advanced discussion with some large cloud computing providers for 900 megawatts of power across two to three sites.

The company's HPC business is currently only at 100 megawatts of power following the completion of its first building at its Polaris Forge 1 campus. That will ramp up to 400 megawatts for CoreWeave by the end of 2027. It also has a 200-megawatt commitment from another customer at its Polaris Forge 2 campus, with some initial capacity projected to come online this year, and a full build-out in 2027.

These projects should lead to a ton of growth moving forward, and the company has the financing in place to complete these projects. The key will be for it to show good returns and operating leverage on these buildouts. If it can do that, the stock has strong upside.

However, given the costs to build out these data centers and its current lack of cash flow, it does put the stock in the high-risk-reward bucket. Investors may want to take a more cautious approach given the stock's huge gains over the past year.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.