Shares of AI data center start-up Applied Digital (APLD +3.54%) have lost about one-third of their value since I last wrote about it back in July. Following a quarterly financial update, the stock initially tanked further before quickly rebounding from those post-earnings losses.
Suffice it to say that stocks like Applied Digital have become a battleground for investors trying to cash in on the AI hype largely powered by Nvidia. Nevertheless, in some ways, Applied Digital has made some financial progress in recent months. Is it time to buy the dip or sell the stock?
NASDAQ: APLD
Key Data Points
A start-up burning through cash
As I outlined in July, the first and most important concern investors should have with a company like Applied Digital is that it's a start-up. That means minimal revenue and sizable losses.
During its first-quarter fiscal 2023 (ended in August), the company said it brought in $36.3 million in sales, compared to a meager $6.9 million in the same period last year. Meanwhile, its net loss increased to $9.2 million, compared to $4.5 million last year, but that's actually a huge improvement on losses when calculated as a percentage of sales.
Revenue growth and scale-up of profit margins may tick the box for some investors, but they don't stop there. Free cash flow, calculated as cash from operating activities minus cash spent on property and equipment (in this case, data centers, as well as AI servers from supply partner Nvidia), dialed in at a hefty negative $28 million. That helped deplete the balance sheet to just $5.9 million in cash, excluding the $25.3 million in restricted cash. Total debt, including nearly $9.2 million in borrowings due for repayment soon, totaled $44.1 million.
Long story short, Applied Digital is likely going to have to raise cash again soon, as it did during its fiscal first quarter by selling $64.5 million worth of new stock -- which has the effect of diluting current shareholders.
Beware of buying the dip
All of this, of course, is in addition to some of the concerns I mentioned in July, as well as implications with the company's quick pivot from cryptocurrency mining to AI (Applied Digital had its IPO in early 2022 as "Applied Blockchain").
Nevertheless, Applied Digital has reported progress in its various data center operations. Some of its existing infrastructure for crypto is operating at full capacity and generating revenue now. And partners -- again, including Nvidia -- are helping fuel the expansion. Applied Digital has landed funding from investors. And it's now onboarding its first AI customer, Character.AI, which was previously announced to have committed $180 million in spending over a two-year period with Applied Digital for AI training.
Management also reiterated its call for fiscal 2024 revenue of as much as $405 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $200 million.
But make no mistake, this remains a high-risk, and only potentially high-reward, investment. Applied Digital is likely to burn through cash for some time in support of its AI data centers, and it could need multiple funding rounds along the way. That's not the kind of stock that does well in the higher-for-longer interest rate environment the Federal Reserve has signaled.
For now, I'm interested in Applied Digital and a number of similar data center upstart peers (like privately owned CoreWeave, which has also received ample funding from Nvidia and others) as this AI training frenzy gets built out. But I believe most investors should be leery of biting on this stock.
