Applied Digital Corporation has surged by more than 200% since November 2022, even outperforming Nvidia (NVDA) last year and nearly catching up at the beginning of this year before dipping. This price action could suggest some investors view the HPC (high-performance computing) data center play as an alternative way to ride the AI story.
Shifting from Blockchain to AI Data Center
Initially known as Applied Blockchain, the company changed its name in November 2022, coinciding with the launch of OpenAI’s ChatGPT. This name change clearly underlies its objective to shift to artificial intelligence.
Now, there are many players in the data center space, including Equinix (EQIX) and Digital Realty Trust (DLR), as well as hyperscalers like Amazon (AMZN). This raises questions about Applied Digital’s competitive edge.
However, there are opportunities, given Nvidia’s massive GPU sales that need to be racked in data centers as part of the AI value chain. Unlike conventional CPUs, GPUs for AI require advanced cooling and power, making retrofitting old data centers less than ideal.
Applied Digital’s greenfield facilities, like its AI data center in North Dakota, built from scratch, address these needs optimally.
Revenue Generating but Making Losses
Applied Digital has an existing conventional facility that generated $37.8 million out of the total $43.3 million in sales for Q3 2024, ending in February. The rest came from its Cloud Services segment, with HPC hosting not yet generating revenue.
Despite generating revenue, the company is currently loss-making. Losses were compounded by a $4.5 million revenue shortfall due to a power outage at its 180 MW data center hosting business in January.
Additionally, there were $21.7 million in losses associated with the “held-for-sale” Garden City blockchain mining facility, sold to Marathon Digital (MARA) for $87.3 million.
Investing Heavily in a Rapidly Growing Gen AI Market
To fund its growth initiatives, Applied Digital secured a $200 million private debt facility, including $125 million of initial commitment. While this increases its debt-to-equity ratio, the investment aims to make the company free cash flow (FCF) positive this year.
Given the high level of investment required, Applied Digital’s approach to providing purpose-built infrastructure for the Gen AI market, expected to grow by $20 billion annually from 2023 to 2030, makes sense. With $200 million secured for the Ellendale facility, the company expects to become FCF-positive this year.
Valuation
Despite the upside, its trailing price-to-cash flow of 18.92x trades at a 6% discount relative to the IT sector. However, considering its strategic position, especially with Nvidia’s Blackwell platform-based GPUs for HPC applications, it deserves more. This positioning differentiates it from other data center plays that mostly install GPUs on behalf of customers.
Applying a target of 24.6x, or half of Nvidia’s price-to-cash flow, indicates a 30% undervaluation. Incrementing the current share price of $5.67 by 30%, a target of $7.4 is realistic.
Risks Related to Delay
However, North Dakota’s location poses supply chain challenges, particularly for items like transformers used for electrifying data centers. Additionally, specific equipment for deploying Nvidia’s cluster solution may cause delays, as seen with an eight-week delay due to late transceiver deliveries for the InfiniBand network.
Revenues to Surge as GPUs Come Online
With the eight H100 GPU clusters potentially yielding $20 million each annually, full deployment could bring $160 million for the HPC segment, boosting overall revenues. The intent is to diversify the customer base to include larger enterprises, which is crucial for predictable revenues.
Solid Price Appreciation Potential
Applied Digital Corporation, as an emerging player in AI infrastructure, offers an alternative to Nvidia, with potential stock appreciation of 30%.
However, given the high leverage, it remains a rate-sensitive stock with inherent volatility risks. Therefore, investors should be prepared for volatility in the stock price.
DISCLAIMER
You should read and understand this disclaimer in its entirety before joining or viewing the website or email/blog list of SmallCapStocks.com (the “Publisher”). The information (collectively the “Advertisement”) disseminated by email, text or other method by the Publisher including this publication is a paid commercial advertisement and should not be relied upon for making an investment decision or any other purpose. The Publisher is engaged in the business of marketing and advertising the securities of publicly traded companies in exchange for compensation. The track record, gains, upside, and/or losses mentioned in the Advertisement, if any, should not be considered as true or accurate or be the basis for an investment. The Publisher does not verify the accuracy or completeness of any information included in the Advertisement. While the Publisher does not charge for the SMS service, standard carrier message and data rates may apply. To unsubscribe from receiving promotional text messages to your phone sent via an autodialer, using your phone reply to the sender’s phone number with the word STOP or HELP for help.
The Advertisement is not a solicitation or recommendation to buy securities of the advertised company. An offer to buy or sell securities can be made only by a disclosure document that complies with applicable securities laws and only in the states or other jurisdictions in which the security is eligible for sale. The Advertisement is not a disclosure document. The Advertisement is only a favorable snapshot of unverified information about the advertised company. An investor considering purchasing the securities, should always do so only with the assistance of his legal, tax and investment advisors. Investors should review with his or her investment advisor, tax advisor or attorney, if and to the extent available, any information concerning a potential investment at the web sites of the U.S. Securities and Exchange Commission (the "SEC") at www.sec.gov; the Financial Industry Regulatory Authority (the "FINRA") at www.FINRA.org, and relevant State Securities Administrator website and the OTC Markets website at www.otcmarkets.com. The Publisher cautions investors to read the SEC advisory to investors concerning Internet Stock Fraud at www.sec.gov/consumer/cyberfr.htm, as well as related information published by the FINRA on how to invest carefully. Investors are responsible for verifying all information in the Advertisement. As an advertiser, we do not verify any information we publish. The Advertisement should not be considered true or complete.
The Publisher does not offer investment advice or analysis, and the Publisher further urges you to consult your own independent tax, business, financial and investment advisors concerning any investment you make in securities particularly those quoted on the OTC Markets. Investing in securities is highly speculative and carries an extremely high degree of risk. You could lose your entire investment if you invest in any company mentioned in the Advertisement. You acknowledge that we are not an investment advisory service, a broker-dealer or an investment adviser and we are not qualified to act as such. You acknowledge that you will consult with your own independent, tax, financial and/or legal advisers regarding any decisions as to any company mentioned here. We have not determined if the Advertisement is accurate, correct or truthful. The Advertisement is compiled from publicly available information, which include, but are not limited to, no cost online research, magazines, newspapers, reports filed with the SEC or information furnished by way of press releases. Because all information relied upon by us in preparing an advertisement about an issuer comes from a public source, it is not reliable, and you should not assume it is accurate or complete.
By your subscription to our profiles, the viewing of this profile and/or use of our website, you have agreed and acknowledged the terms of our full disclaimer and privacy policy which can be viewed at the following link: www.SmallCapStocks.com/Disclaimer and www.SmallCapStocks.com/Privacy-Policy
By accepting the Advertisement, you agree and acknowledge that any hyperlinks to the website of (1) a client company, (2) the party issuing or preparing the information for the company, or (3) other information contained in the Advertisement is provided only for your reference and convenience. The advertiser is not responsible for the accuracy or reliability of these external sites, nor is it responsible for the content, opinions, products or other materials on external sites or information sources. If you use, act upon or make decisions in reliance on information contained in any disseminated report/release or any hyperlink, you do so at your own risk and agree to hold us, our officers, directors, shareholders, affiliates and agents harmless. You acknowledge that you are not relying on the Publisher, and we are not liable for, any actions taken by you based on any information contained in any disseminated email or hyperlink.
