1 Incredible AI Stock that Wall Street Thinks Can Soar 59% Over The Next Year
Key Points
Applied Digital is completing several construction projects at once.
One concern is that the data center operator has a hefty debt load.
There are probably better, more solid ways to invest in AI these days.
- 10 stocks we like better than Applied Digital ›
Pinpointing stocks that Wall Street believes have huge upside is a great way to source ideas. While investors still need to do their own research, finding companies with lofty one-year average price targets can yield some great ideas.
One of those is data center specialist Applied Digital (NASDAQ: APLD). Right now, its stock trades for about $28.50 per share. However, the average price target is $45.27. That implies an upside of nearly 60%, and it looks like a compelling stock to consider.
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So, is Applied Digital a strong buy right now?
Image source: Getty Images.
Applied Digital is capitalizing on massive AI spending
Applied Digital builds and operates data centers. This has been a booming industry thanks to massive artificial intelligence (AI) demand and has caused demand for its properties to soar. Currently, it's constructing several data centers whose computing capacities have already been contracted out, but there is still a long way to go on many of these projects.
Its Polaris Forge 1 location has 100 megawatts (MW) of computing power ready to go, but that's only the first phase of this project. There will be two additional phases that will bring its total power to 400 MW. This facility has already been contracted out to CoreWeave, but it's not the only location going up. The Polaris Forge 2 is starting construction and will provide an additional 200MW of computing capacity.
As these buildings are put up, more and more clients may seek to partner with Applied Digital, as they are providing turnkey solutions to place chips in and run AI workloads. This could be a compelling option for companies that want to get as much computing capacity as possible, leading to huge gains for Applied Digital shareholders.
However, there is a bit of a concern. Applied Digital is financing its buildout with debt, which should come as no surprise to real estate investors. Debt is a resource in this industry. As long as these projects are financed responsibly, there should be no issue in Applied Digital operating a successful business, especially because it's signing 15-year leases.
In Q2, it raised $2.35 billion at a 9.25% rate, which isn't a cheap rate to finance a business. This should give investors some pause, as it shows that the financier isn't sure about the longevity of the loan and thus the higher rate to compensate for risk.
I'm in the same boat; there are several ways to invest in AI that aren't as risky as Applied Digital, such as computing unit providers that will make money as Applied Digital completes more projects. While Applied Digital may work out and be a fantastic investment pick in its own right, I think the risk is too great, and investors should look at tried-and-true ways to invest in AI, rather than some aggressively financed new ways.
Should you buy stock in Applied Digital right now?
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Keithen Drury 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.
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