Is Applied Digital Stock a Buy?

A new class of cloud computing companies, called neoclouds, is rushing to capitalize on the artificial intelligence supercycle. Neoclouds specialize in building data centers designed to meet the rigorous requirements of training and powering AI software and systems.

One compelling neocloud to consider investing in is Applied Digital (NASDAQ: APLD). It owns data centers and leases out their compute capacity to AI enterprises. Its stock has tumbled by about 50% since hitting a 52-week high of $50.73 in May. But that share price drop could be a buying opportunity.

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Applied Digital's strengths

One of the factors making Applied Digital an attractive investment is its role as a specialized AI infrastructure landlord. The long-term lease agreements it inks with top-tier hyperscale customers will provide it with massive, predictable revenue for years to come.

The company has already secured agreements worth $36 billion over the next 15 years. These leases have renewal options that, if exercised, could deliver up to $86 billion over 30 years.

Applied Digital has structured the contracts as take-or-pay lease agreements. This requires tenants to pay the contractually specified base rents regardless of whether they fully utilize the computing capacity they have reserved, reducing the potential for revenue loss from underutilization.

The data center provider possesses another advantage. It's not only a landlord. It also supplies AI computing capacity to hyperscalers, such as Microsoft. It does this through ChronoScale (NASDAQ: CHRN), a business that it spun off in May, though Applied Digital retains about 97% ownership. ChronoScale's stock has been volatile so far, but it's up by more than 100% since it started trading.

Applied Digital's downsides

Despite its successes, there are negatives to Applied Digital's business that help explain why the stock has fallen lately. One is that the company is piling on debt to fund the build-out of its data centers.

As of May 31, the end of its fiscal 2026 fourth quarter, it had about $5 billion in debt, a substantial increase from less than $700 million a year earlier. Moreover, Applied Digital cannot collect rents on all the leases it has signed until it completes construction of additional data centers. That's why it reported only $258.7 million in fiscal Q4 revenue. However, that did represent over 400% year-over-year growth.

The company also faces an uncertain macroeconomic environment, a shortage of the memory chips that data centers require, and soaring energy costs stemming from the U.S. war with Iran -- a set of headwinds that led investors to flee the stock. The share price could rebound as Applied Digital makes progress on delivering its promised facilities to its tenants. However, this will take years, and the pace at which it will turn its contracted deals into revenue will be gradual. The company is projected to book just $1.45 billion in revenue in its fiscal 2028, out of a contracted backlog of $36 billion.

Applied Digital's share price is near its 52-week low. That said, its price-to-sales ratio of about 11 is not cheap, suggesting Wall Street may have already priced in a fair amount of the revenue growth that's anticipated as more data centers come online.

Therefore, Applied Digital shares only look like an appropriate buy at this point for long-term investors with a high risk tolerance, given the multiyear timeline for unlocking the company's contracted revenue.

If that description doesn't fit you as an investor, but you're still looking to gain exposure to the AI infrastructure market, a better approach could be to invest in data center ETFs.

Robert Izquierdo has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.