Up 375%, Should You Buy Applied Digital Right Now?

Applied Digital (NASDAQ: APLD) is attracting investor attention these days for its role in building and operating artificial intelligence (AI) data centers. The company provides cloud infrastructure that's used by many of the world's leading AI companies. And it has a key partnership with top AI accelerator designer Nvidia that gives it access to the graphics processing units (GPUs) it needs to power that infrastructure.

As demand for AI data center capacity has surged, Applied Digital's share price has risen sharply. It's up by 375% over the past 12 months alone. But despite these impressive returns, the business model has significant drawbacks and faces serious potential headwinds.

Here's why Applied Digital stock probably isn't worth buying right now.

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Why Applied Digital stock has soared

Applied Digital builds data center infrastructure and leases the computing power to a slew of technology companies, including CoreWeave -- and business has been booming.

In its fiscal 2026 second quarter, which ended Nov. 30, the company's sales surged 250% to nearly $127 million. It has also been expanding its data center footprint and signing multiyear leasing agreements with customers. For example, its lease agreements with CoreWeave could generate up to $16 billion in revenue over 15 years.

Applied Digital is clearly benefiting from demand for AI infrastructure, and it's betting that it will continue to grow as more tech companies spend money for AI processing power. For example, Nvidia's management has forecast that artificial intelligence infrastructure spending could reach between $3 trillion and $4 trillion over the next five years.

Sales are booming, but so are expenses

It's understandably tempting to buy AI stocks that have been steadily posting impressive returns -- it can seem like such equities have nowhere to go but up. However, when it comes to Applied Digital, there are significant red flags that shouldn't be overlooked.

The first is that while its sales are increasing quickly, its spending is increasing rapidly as well, and the company is not profitable. It's a problematic sign when a company's sales increase by 250% and in the same quarter, its total expenses also rise by 230% -- in this case, to nearly $158 million.

Applied Digital narrowed its bottom-line loss in its fiscal Q2, which was good, but it still reported a non-GAAP diluted loss of $0.07 per share. That's a problem because the boom phase of the AI cycle is well underway. If there were ever a time when a company like Applied Digital ought to be able to turn a profit, it's right now.

This leads into the second potential red flag: At some point, spending on AI data center infrastructure is going to slow down. There's already talk that some tech companies are not seeing large enough returns on their AI investments, and Microsoft's stock recently dipped sharply, in part due to investor fears that its AI spending is too high and isn't delivering a big enough payoff.

While the trend of torrid spending on AI could persist for a few more years, no one knows when it might taper off. But I think it's safe to say that when tech giants start hinting that they plan to spend less money on AI infrastructure, Applied Digital's share price -- and its sales -- will feel the pinch.

Finally, this stock is just too dang expensive. Applied Digital's shares trade at a price-to-sales ratio of about 31 right now, compared to the tech sector's average ratio of about 9. That means investors are overpaying for an AI tech company that hasn't figured out how to make a profit even during a booming AI market. Add it all up, and it's pretty clear that investors would be better off leaving this stock alone.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.