Applied Digital's (APLD 10.18%) stock price has surged nearly 140% over the past 12 months amid the buying frenzy in artificial intelligence (AI) stocks. But unlike Nvidia (NVDA 2.25%) and its peers, Applied Digital isn't actually an AI company. Instead, it merely builds or buys big data centers, makes sure they're powered, and then rents out the spaces to other companies that install their own servers.

In other words, it's just a data center developer like Digital Realty Trust (DLR 2.79%) and Equinix (EQIX 1.90%). Prior to its rebranding last November, Applied Digital was known as Applied Blockchain, a niche company that mainly rented out its data centers to blockchain app developers and Bitcoin miners.

Two IT professionals walk through a data center.

Image source: Getty Images.

But under its new brand, Applied Digital plans to rent out its data centers for AI-oriented applications. Nvidia's recent inclusion of Applied Digital as an "elite partner" in its Nvidia Partner Network (NPN) further elevated its profile and suggested it was a promising investment in the secular growth of the AI market. However, smart investors should keep these three things in mind before buying this small-cap stock.

1. Applied Digital could become a REIT

In its latest 10-K filing, Applied Digital says it could convert itself into a real estate investment trust (REIT) like Digital Realty and Equinix. This means Applied Digital could start paying dividends once it turns profitable.

REITs are required to pay out 90% of their taxable income to their investors as dividends in exchange for a lower tax rate. Digital Realty currently pays a forward dividend yield of 4.2%, while Equinix pays a lower forward yield of 1.9%.

Applied Digital isn't profitable on a generally accepted accounting principles (GAAP) basis yet, but analysts expect it to generate $32 million in net income in fiscal 2024 (which ends next May). They expect that figure to more than triple to $112 million in fiscal 2025.

Applied Digital's volatile stock might stabilize after it becomes a REIT and starts paying dividends, but its own ownership structure could delay that conversion. REITs generally prevent any individual investor from holding more than 9.8% of their shares, but Applied Digital's CEO Wes Cummins still owns more than a fifth of those shares.

2. Applied Digital's future growth relies on two big customers

Back in May, Applied Digital formed a new subsidiary called Sai Computing to exclusively rent out data centers to AI companies and cloud service providers. Shortly afterward, Sai signed on its first major AI customer with a deal "worth up to $180 million over a 24-month period" that includes a "significant" prepayment. In June, Sai signed on a second customer in a deal that could be "worth up to $460 million over 36 months."

Those deals sound like game changers for a company that only generated $55 million in revenue in fiscal 2023. But Applied Digital didn't actually name those customers, while its liberal usage of the phrase "worth up to" makes it impossible to gauge the true value of these deals.

Yet analysts are already baking these deals into their long-term forecasts. They expect Applied Digital's revenue to soar to $852 million in fiscal 2026, which would represent a jaw-dropping compound annual growth rate (CAGR) of 149% from fiscal 2023.

They also expect its operating margin to rise from 18.1% in fiscal 2024 to 22.3% in fiscal 2026, even as the company installs tens of thousands of new GPUs to power its AI-optimized data centers. That's an incredible outlook for a stock that trades at just 1.5 times next year's sales -- but all of that growth is tightly tethered to two unnamed companies.

3. Applied Digital's insiders are net sellers

If Applied Digital were as undervalued as those forecasts suggest, its insiders should be buying up a lot more shares before it scales up its business. But over the past three months, its insiders have actually sold nearly six times as many shares as they bought. Some 13% of its shares were also still being shorted as of Sept. 28.

That chilly insider sentiment, along with an unresolved class action lawsuit regarding the company's messy ties with its IPO underwriter B. Riley Financial, suggest its upside potential could be limited until Sai Computing actually recognizes more revenue from its big AI and cloud service deals.

Until that happens, investors should remain deeply skeptical regarding that deal and any other big announcements -- and remember that it's still a tiny company compared to Digital Realty Trust and Equinix.

What do these three issues mean for the bulls?

I recently said I wouldn't buy Applied Digital because its abrupt rebranding, murky AI deals, customer concentration, and rising leverage (it had a debt-to-equity ratio of 3.3 in its latest quarter) all raise bright red flags for its future. These three additional facts won't dispel that bearish thesis, so I won't touch this speculative stock anytime soon.