As Revenue Surges 400%, Is Applied Digital Stock a Buy?

Applied Digital (NASDAQ: APLD) is the tale of two tapes. The stock is up about 150% over the past year, but its shares have also been nearly cut in half from their spring highs. With the company's revenue surging, the question on many investors' minds now is whether it's time to buy the stock when it's down.

Revenue growth surges

Applied Digital is more of an AI data center landlord than it is a tech company. It spun out its cloud computing business and merged it with EKSO Bionics Holding earlier this year to create a new company called ChronoScale (NASDAQ: CHRN), although it still holds a 96% stake in the new entity. Meanwhile, it is considering converting into a real estate investment trust (REIT).

Applied Digital's main business today is building and operating data centers designed to handle AI workloads. However, it does still have a data center hosting business that serves cryptocurrency miners, which was its original business. Its biggest attribute is its access and ability to source cheap power and know-how for constructing facilities that can house massive data centers.

Applied Digital has been seeing rapid revenue growth, which continued in fiscal Q4 with its revenue soaring 407% to $258.7 million. Excluding the spun-off ChronoScale, revenue rose from $38 million to $240.4 million.

The company's high-performance computing (HPC) business accounted for $203 million of its revenue, with $44.1 million tied to base rent and $6.5 million related to tenant recoveries. The bulk of it, $152.1 million, came from tenant fit-out services, which is revenue it gets from constructing dedicated facilities for large customers.

This revenue is coming mostly from its largest customer, CoreWeave. Tenant fit-out services have low gross margins, but they do lead to future, higher-margin recurring revenue.

Its data center hosting business, meanwhile, saw its revenue slip by 2% to $37.63 million, with operating income of $12.5 million. This is Applied Digital's legacy business, comprising two facilities in North Dakota with 286 megawatts of power dedicated to cryptocurrency mining.

On the profitability front, the company reported adjusted net income of $12.9 million, or $0.04 per share. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $42.4 million, compared to $1 million a year ago.

Applied Digital ended the quarter with $1.6 billion in unrestricted cash against $5 billion in debt. It reported operating cash flow of $89.7 million and negative free cash flow of $2.8 billion.

During the quarter, Applied Digital signed leases for three new campuses worth $20 billion in lease value with a single high-investment-grade hyperscaler. In total, it has now signed leases for five campuses, bringing its contracted long-term lease value to $36 billion.

Image source: Getty Images.

Is the stock a buy?

Applied Digital continues to grow revenue quickly, although much of this is coming from low-margin non-recurring tenant fit-out service revenue. However, this does help set the stage for future recurring revenue. At the same time, the company is burning through cash, expanding its data center campuses, and taking on significant debt.

That said, its business should be inherently less risky than that of neocloud operators. It isn't buying pricey graphics processing units (GPUs), so it faces less technology obsolescence risk, and it is getting long-term leases. Having CoreWeave as its primary customer is a risk, but a large hyperscaler becoming its primary tenant in the future will be a plus.

With Applied Digital projecting it will hit a $1 billion net operating income (NOI) run rate a year from now and a strong, growing backlog, the stock looks intriguing here. I'd still place it in the high-risk, high-reward category, but with power still one of the big AI infrastructure bottlenecks, the company looks to be in a solid long-term position.

Geoffrey Seiler 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.