Applied Digital (NASDAQ: APLD) insiders have been buying the dip as the artificial intelligence (AI) stock continues to slide. The company’s CEO and president bought a combined $6.7 million worth of shares on Oct. 16. Despite the insider buying, Applied Digital is down by more than 30% over the past month.
No doubt, sentiment around AI stocks has soured lately, but that doesn’t mean fundamentals have weakened. These are some details to consider when deciding whether Applied Digital is a buy.
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Applied Digital is realizing AI revenue
Applied Digital makes money by building AI data centers. The company creates the facilities, and then it’s up to customers to bring their own hardware. CoreWeave is one of Applied Digital’s largest customers with 15-year leases valued at up to $11 billion in revenue over that stretch.
The total deal covers 400 megawatts, putting the value of each megawatt at $1.83 million per year. While some AI data center companies are multiple years away from building facilities and generating revenue, Applied Digital is already seeing big gains on its balance sheet. Revenue surged by 322% year over year to reach $341.9 million in its fiscal 2027’s first quarter.
Costs have also been surging, leaving the company still unprofitable, though that’s common in the AI data center industry. Even Nebius remains deeply unprofitable despite high revenue growth. This is normal because it costs a lot of money to build data centers. As Applied Digital completes more of its facilities and attracts more customers, revenue will start to outpace costs.
AI demand isn’t going anywhere
Every quarter seems to feature a news cycle of waning demand for AI and concerns about a popping bubble. However, the tech executives who know the most about the industry regularly speak about substantial growth and demand, and their fundamentals back up their talk.
Elon Musk told investors when discussing Space Exploration Technologies‘ quarterly results that the company is “hounded” by hyperscalers and dozens of smaller companies that are seeking compute. Demand is still accelerating, prompting higher contract values.
It’s a good environment for Applied Digital as it brings more of its facilities online. Not only will it start to realize more revenue from its backlog, but Applied Digital is also gaining the flexibility to charge higher prices to future customers.
Musk told investors to expect $100 billion in annual recurring revenue by December. Applied Digital benefits from the same tailwinds as SpaceX’s AI business. That should eventually show up in the stock price even though doom and gloom has been the common narrative in recent weeks.
Applied Digital’s Achilles’ heel
Although Applied Digital is in the right industry and is building high-demand infrastructure that can command lofty contract values, there are some problems. The two big flaws are that Applied Digital uses a colocation model and locks in long-term contracts. Colocation involves building a facility and letting the hyperscaler bring their own chips and other resources. It’s a less capital-intensive effort, which lets Applied Digital build more data centers with less overhead.
However, there’s a big catch. Remember the $1.83 million annual megawatt value Applied Digital secured with CoreWeave? That’s not much when compared to Nebius landing $40 million to $50 million per megawatt each year on short-term deals.
Nebius puts more capital into its data centers and also operates a cloud platform. Neoclouds are more complex to set up than colocation facilities. However, the revenue ceiling is much higher. Nebius was only receiving annual contract values of $12 million per megawatt. The value of a megawatt has more than quadrupled in less than one year for short-term deals, and that type of momentum suggests more lucrative deals in the future.
Applied Digital hasn’t put itself in a good position to capitalize on rising megawatt prices since it isn’t a neocloud and it signs 15-year leases with its tenants. Meanwhile, capital expenditures can climb at these sites where Applied Digital has locked in relatively low annual contract values per megawatt. Applied Digital is in the right industry and looks oversold at current levels, but pure neoclouds are a better way to approach the opportunity.
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Marc Guberti 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.
