Why Did Applied Digital Stock Plummet This Week?

Key Points

• Applied Digital expanded its deal with CoreWeave, raising the deal value to $11 billion.

• The company must finance the construction to meet the massive capacity requirements.

• 10 stocks we like better than Applied Digital ›

Shares of Applied Digital (NASDAQ: APLD) fell this week, down 13.1% as of market close on Friday. The drop comes as the S&P 500 and the Nasdaq-100 were up 0.3% and 0.1%, respectively.

The AI data center company announced last week that it secured an additional 150MW (megawatt) lease agreement with CoreWeave. Shares slid this week as investors weighed concerns around valuation and how the expanded capacity will be financed.

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Applied Digital lands massive deal, but execution questions loom

Applied announced that CoreWeave will lease an additional 150MW of capacity at its North Dakota campus, bringing Applied Digital's total anticipated contracted lease revenue to approximately $11 billion, a figure that includes $7 billion in value previously announced.

To put that into perspective, Applied Digital's current market capitalization stands at roughly $3.6 billion, meaning this relationship represents more than double the company's entire market cap -- though spread out over 15 years.

Applied Digital now faces the challenge of actually building and financing a major expansion of the existing infrastructure. The company will need to construct three separate data centers over the next two years, requiring substantial capital expenditure at a time when borrowing costs remain elevated.

Valuation concerns remain

The opportunity is enormous, but the risks are too. The company already carries a significant debt load and will have to borrow more at high rates or dilute its stock. Furthermore, the fact that this one customer represents such a large portion of its revenue is a risk in and of itself, especially when that company is also highly levered and reliant on a very small customer base.

The risks are too great here, and I would stay away from Applied Digital stock -- and CoreWeave stock as well, for that matter.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.