Applied Digital: A Most Improbable Investment

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Applied Digital (APLD 3.60%), a company currently engaged in the business of providing physical space for the intangible thoughts of machines (a concept that, when you really think about it, is rather astonishing), has recently experienced a surge in its share price. This is, apparently, due to its involvement in the construction and operation of data centers dedicated to the pursuit of Artificial Intelligence – a field that, let’s be honest, mostly involves computers getting better at pretending to be people. They’ve forged a partnership with Nvidia, purveyors of exceptionally powerful calculators, allowing them access to the graphical processing units (GPUs) needed to fuel this digital mimicry. And, as a result, the stock has enjoyed a rather enthusiastic upward trajectory.

Over the past twelve months, the share price has ascended by a rather improbable 375%. One begins to suspect the involvement of exceptionally well-trained pigeons. However, before anyone rushes to mortgage their house and invest everything, a closer examination reveals a business model riddled with caveats and facing headwinds of potentially significant proportions. (It’s always the proportions, isn’t it? Everything comes down to proportions. And the curvature of spacetime. But mostly proportions.)

Therefore, with a degree of regret (and a firm belief in shareholder value), I must advise against purchasing Applied Digital stock at this juncture.

Why the Stock Has Achieved Lift-Off

Applied Digital constructs the physical infrastructure – rows and rows of blinking lights and humming servers – and then leases the computing power to companies like CoreWeave. Business, it would appear, is booming. (Booming, in the digital age, is a curiously quiet affair. No actual booms. Just increasing numbers on a screen.) In their recent fiscal quarter (which, as far as anyone can tell, still lasts three months), sales increased by a frankly alarming 250%, reaching nearly $127 million. They’ve also been expanding their data center footprint, signing multi-year leasing agreements. For example, their arrangement with CoreWeave could potentially generate up to $16 billion in revenue over the next fifteen years. (Assuming, of course, that the universe doesn’t spontaneously rearrange itself before then.)

Applied Digital is, quite naturally, benefiting from the current demand for AI infrastructure. They’re betting that this demand will continue to grow as more tech companies pour money into the pursuit of artificial cleverness. Nvidia’s management has even predicted that spending on AI infrastructure could reach between $3 trillion and $4 trillion over the next five years. (A sum so vast it almost defies comprehension. It’s roughly equivalent to the combined GDP of several moderately sized galaxies.)

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Sales Are Ascending, Expenses Are Following Suit

It’s understandably tempting to acquire shares in AI companies that consistently post impressive returns. It creates the illusion that these equities have nowhere to go but up. However, in the case of Applied Digital, there are several red flags that shouldn’t be ignored. (Flags, of course, are merely pieces of cloth attached to sticks. Their significance is entirely arbitrary.)

Firstly, while sales are increasing rapidly, so too are expenses. The company is, as yet, not profitable. It’s a concerning sign when sales increase by 250% and, in the same period, total expenses rise by 230% – in this case, to nearly $158 million. (It’s like running up an escalator that’s moving downwards. Energetic, but ultimately futile.)

Applied Digital did narrow its bottom-line loss in the recent quarter, which is a positive development. However, they still reported a non-GAAP diluted loss of $0.07 per share. This is problematic because the boom phase of the AI cycle is already well underway. If there were ever a time for a company like Applied Digital to turn a profit, it’s now. (One might even say it’s a matter of basic physics. But then again, what isn’t a matter of basic physics?)

This leads to the second potential concern: At some point, spending on AI data center infrastructure will inevitably slow down. There’s already talk that some tech companies aren’t seeing the returns on their AI investments they anticipated. Microsoft’s stock recently experienced a dip, in part due to investor concerns that their AI spending is excessive and isn’t delivering a sufficient payoff. (The universe, it seems, has a peculiar fondness for balance. Excessive anything tends to be…discouraged.)

While the current level of spending on AI could persist for a few more years, no one knows when it might subside. However, it’s safe to assume that when tech giants begin to hint at reducing their expenditure on AI infrastructure, Applied Digital’s share price – and its sales – will feel the impact. (It’s a bit like removing the oxygen supply. Things tend to…deflate.)

Finally, the stock is simply too expensive. Applied Digital’s shares trade at a price-to-sales ratio of approximately 31, compared to the tech sector’s average ratio of around 9. This means investors are overpaying for an AI tech company that hasn’t yet figured out how to generate a profit, even during a booming AI market. (It’s a bit like paying a premium price for a perpetually unfinished painting. A bold move, to say the least.) Adding it all up, it’s clear that investors would be better served by exploring alternative investment opportunities.

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2026-02-04 17:42