What happened

Applied Digital (APLD 0.52%) saw its stock price drop 15.2% this week, as of Friday at 12:40 p.m. ET, according to S&P Global Market Intelligence. The stock had been down as much as 16.3% during the week. Applied Digital is now trading at about $6 per share.

The markets struggled this week, as the S&P 500 was down 2.2%, the Dow Jones Industrial Average dropped 2.2%, and the Nasdaq Composite plunged 2.8%, as of Friday at 12:40 p.m. ET.

So what

Applied Digital runs data centers that provide digital infrastructure solutions for the high-performance computing (HPC) industry. It has been on a tear this year, with its stock price up nearly 225%, trading at $6 per share. It had peaked at over $10 per share in July, up more than 400%.

What stalled the momentum this week was likely a lawsuit filed by shareholders of the company, alleging certain false and misleading statements and failure to disclose connections with the underwriter of the IPO, investment bank B. Riley.

This follows a report by market analyst firm Wolfpack Research in early July that questioned the company's business model and its new focus on becoming an artificial intelligence (AI) cloud service provider.

Now what

In July, Applied Digital announced that it had onboarded its first major AI cloud services customer, Character.AI. At the same time, it received the first prepayment of its 24-month, $180 million contract.

The lawsuit aside, the stock has already had a big run-up, and its forward price-to-earnings (P/E) has jumped to 36, while its price-to-sale ratio is over 10. It may be best to watch this stock for a bit, given its valuation, and see how these legal issues get sorted out.