Applied Digital Stock Has Been Volatile, but the Long-Term Setup Looks Compelling

There's no denying that Applied Digital (NASDAQ: APLD) has been one of the hottest stocks on the market during the past year, rising almost 300% as of this writing. However, a closer look at recent stock price action shows it has been volatile.

Applied Digital stock witnessed a red-hot rally for the better part of 2025, hitting a 52-week high in mid-October last year. The stock has been seesawing since then and is trading about 13% below its 52-week high (as of Jan. 21). The shares also fell after the company's fiscal-second-quarter (ended Nov. 30) earnings release, when it reported a net loss of $19 million -- a big improvement from a year earlier.

Savvy investors, however, would do well to look past the recent stock price fluctuations in this artificial intelligence (AI) company for a very simple reason.

Image source: Getty Images.

Applied Digital's growth story is just getting started

Applied Digital is known for designing, constructing, and managing data centers. The company is therefore operating in a booming industry experiencing rapid growth driven by AI. According to McKinsey, demand for AI-specific workloads in data centers is set to jump by 3.5 times between 2025 and 2030.

As a result, a total of 124 gigawatts (GW) of incremental AI data center capacity is expected to be added during this period. This clearly indicates that the need for Applied Digital's services will remain robust. More importantly, the company's business model will ensure that it not only benefits from the buildout of AI data centers, but also gets revenue from operating those data centers.

Applied Digital provides fit-out services for its tenants at two data center complexes it is building in North Dakota, constructing or customizing the data center as per their requirements. But first, it signs long-term lease agreements with tenants, typically hyperscalers and neocloud companies. Applied Digital has already leased out 600 megawatts (MW) of the data center capacity that it is constructing at its two campuses in the state.

These contracts point toward potential lease revenue of $16 billion during the next 15 years, in addition to the fit-out revenue. Importantly, Applied Digital has already started generating lease revenue by readying its first 100 MW data center for service. The company notes that it invested more than $1 billion in this data center. Extrapolating that cost to the 600 MW of data centers it is constructing suggests Applied Digital will spend more than $6 billion on construction.

The potential lease revenue it is likely to generate will be much higher than the cost of data center construction. Moreover, management noted on its January earnings call that it is focused on quickly building data centers and reducing construction costs. According to Chief Executive Officer Wesley Cummins:

Our current data center designs are modular and highly efficient, allowing us to run numerous concrete plants simultaneously and leverage prefabricated components delivered by 18-wheelers.

Another important point is that Applied Digital expects to increase its overall data center capacity to 5 gigawatts (GW) during the next five years. Management points out that it is working on three new data center campuses. Moreover, Applied Digital controls the land or has signed agreements with utility companies for 4.3 GW of capacity, indicating that the company has the potential to grow significantly.

The stock is expensive, but investors shouldn't miss the bigger picture

Applied Digital stock is trading at an expensive 33 times sales. However, its impressive growth trajectory justifies that valuation.

APLD Revenue Estimates for Current Fiscal Year data by YCharts

Additionally, investors shouldn't forget that Applied Digital serves a market where demand far exceeds supply. According to Goldman Sachs, data center demand will exceed supply by 10 GW on average during the next three years. So, we should see Applied Digital winning more contracts from hyperscalers and infrastructure providers to design, develop, and deploy additional data centers.

We have already seen that the company anticipates $15 billion in lease revenue from the 600 MW of capacity it has already leased out, suggesting it will generate $25 million in lease revenue per MW. For comparison, it is spending between $11 million and $13 million to build each MW of capacity.

So, Applied Digital has the potential to become a profitable company in the long run, which is why savvy investors should look past the recent volatility and continue holding this AI stock in their portfolios, as it plays a key role in the proliferation of this technology.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.