Applied Blockchain, a builder of data centers for blockchain applications and Bitcoin mining, went public on April 13, 2022, at $5 a share. But by Dec. 19, it had sunk to an all-time low of $1.45. Rising interest rates, plunging cryptocurrency prices, and the market's waning enthusiasm for blockchain technologies crushed its stock. It also generated just $8.5 million in revenue in fiscal 2022 (which ended in May 2022) while racking up a net loss of $23.5 million.
But last November, Applied Blockchain rebranded itself as Applied Digital (APLD -2.00%) and said it would focus on the high-performance computing (HPC) market as it expanded beyond the blockchain and Bitcoin markets.
Image source: Getty Images.
Specifically, it said it would provide data centers for "artificial intelligence, machine learning, non-real-time graphics rendering, natural language processing, and many more applications that require significant computing power." Investors initially shrugged at those claims, but the subsequent buying frenzy in AI stocks -- which was driven by the rise of generative AI platforms like OpenAI's ChatGPT -- lit a fire under Applied Digital's shares.
On June 23, 2023, Applied Digital's stock hit an all-time high of $11.62 -- representing a gain of more than 700% in just seven months -- before dropping back to about $5. Is it too late to buy this volatile AI stock after all those wild swings?
Applied Digital isn't really an AI company
Applied Digital doesn't actually build any servers. It only builds or buys large data centers, makes sure they're adequately powered, and rents out the space to other companies that install their own servers.
Therefore, it's really just a data center developer like Digital Realty Trust (DLR 0.95%) or Equinix (EQIX -0.91%), and investors should probably classify it as a real estate company instead of a tech business. In its latest 10-K filing, the company even says it could convert itself into a real estate investment trust (REIT) in the near future.
Yet Applied Digital continues to promote the idea that it's an AI company. On May 15, 2023, it formed a new subsidiary called Sai Computing to exclusively provide data center space for AI cloud service providers. A day later, Sai Computing signed on its "first major AI customer with an agreement worth up to $180 million over a 24-month period," and that deal included a "significant" prepayment. On June 23, Sai signed on a second customer in a deal "worth up to $460 million over 36 months."
In fiscal 2023, Applied Digital's revenue rose 548% to $55.4 million but its net loss nearly doubled to $44.6 million. However, Sai's first two deals suggest it could generate hundreds of millions in fresh revenue over the following three years. For fiscal 2024, it expects its revenue to surge 595%-631% to $385 million-$405 million.
It expects economies of scale to kick in
Applied Digital is still deeply unprofitable on a generally accepted accounting principles (GAAP) basis, but it narrowed its adjusted earning before interest, taxes, depreciation, and amortization (EBITDA) loss from $6 million in fiscal 2022 to just $146,000 in fiscal 2023. It expects its adjusted EBITDA to rise to a positive $195-$205 million in fiscal 2024.
That bold forecast suggests economies of scale will kick in as Sai Computing expands, and that its recent orders for over 26,000 GPUs to drive the expansion of its AI-oriented data centers won't crush its gross margins.
With an enterprise value of $562 million, Applied Digital only trades at 1 and 3 times its revenue and adjusted EBITDA estimates, respectively, for fiscal 2024. Equinix trades at 10 times this year's revenue and 22 times its adjusted EBITDA. Digital Realty Trust trades at 10 times this year's revenue and 20 times its adjusted EBITDA.
But it's still a speculative stock
Applied Digital's stock looks cheap relative to its growth potential and industry peers, and its recent inclusion as an "elite partner" in Nvidia's Partner Network (NPN) could elevate its profile and help it lock in more customers.
But Applied Digital still has major customer concentration issues and faces a class action lawsuit regarding its messy ties with its IPO underwriter B. Riley Financial (RILY 6.14%). Applied Digital's CEO Wes Cummins, who owns more than a fifth of the company's shares, was also the founder and CEO of 272 Financial, an investment advisory firm that B. Riley acquired in 2021. Several other executives also have close ties to B. Riley and Cummins' other former employers.
Furthermore, Applied Digital's debt-to-equity ratio also surged from 0.6 to 3.3 between the fourth quarters of fiscal 2022 and fiscal 2023 as it took on more debt -- a lot of which was funded by B. Riley -- to fund the expansion of Sai's AI-oriented data centers. That high leverage could make it unattractive as long as interest rates stay elevated.
I don't think it's too late to buy Applied Digital as a speculative growth play, since it still looks fundamentally cheap. However, its abrupt rebranding, sudden deals with two unnamed customers, soaring leverage, and unresolved questions regarding its relationship with B. Riley are all preventing me from loading up on this "AI" stock.
