Shares of Applied Digital (APLD 9.33%) have surged 295% year to date, driven by rising demand for additional data center capacity. As one of the leading builders of data centers, the company is benefiting from continued growth in spending on artificial intelligence (AI) infrastructure.
While there are risks associated with executing its growth strategy, Applied Digital is poised to announce more leasing deals for its data centers over the next year, which serves as a significant catalyst for the stock.
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Energized data centers are rising in value
Publicly traded hyperscalers are expected to spend $350 billion this year on AI data centers. However, McKinsey has projected that data centers will need $6.7 trillion worldwide to meet the demand for compute power by 2030.
The problem is that current lead times for new data centers are at least five years, including securing the land and electricity to bring these facilities online. Hyperscalers can't wait that long; they need data center capacity now to meet the surging demand for AI cloud services. Applied Digital is one of the few builders that has a pipeline of construction projects in development.
Applied Digital has already signed one long-term lease agreement with CoreWeave for its Polaris Forge 1 campus in North Dakota. The company will supply 400 megawatts (MW) of data center load to CoreWeave in exchange for $11 billion in revenue over 15 years.
The stock has tripled since the company announced its CoreWeave deal on June 2. In October, Applied Digital announced a second 15-year lease with an undisclosed hyperscaler valued at $5 billion. Applied Digital will supply 200 MW of data center load to this customer. More deals are expected to follow, as the company has 4 gigawatts (GW) worth of data center load in its active development pipeline.
NASDAQ: APLD
Key Data Points
Why invest in Applied Digital?
There are risks to watch. Building data centers requires high up-front costs before all the revenue can be realized. For example, the company's Polaris Forge 2 campus will need approximately $3 billion in funding.
The potential for construction delays is the most significant risk here, as Applied Digital is not profitable, reporting a net loss of $28 million last quarter. It requires financing, which involves taking on debt, to build data centers and ultimately establish a profitable business.
The good news is that Applied Digital has shortened its data center build times from 24 to 12 months. Moreover, it has secured $5 billion of funding from Macquarie Asset Management to fund construction, which reduces the company's financing risk. The ability to secure this financing also shows confidence from institutional investors in Applied Digital's growth strategy.
Hyperscalers are getting desperate for new data centers. This provides a significant catalyst for the stock to reach new highs following the announcement of any new lease agreements in the near term. The company's current market cap of $8.4 billion appears to fairly value the existing deals it has made this year, leaving more upside for investors with each new lease agreement announced.
