There has been a ton of interest in Applied Digital (APLD +14.07%) stock, and for good reason. The stock of the company that develops artificial intelligence (AI) data centers has returned some 272% over the past year and is already up 42% year to date.
While there's a massive amount of growth potential for Applied Digital, there are some concerns as well. The company carries a huge amount of debt to build its data centers, and at the same time, it is not yet profitable.
Further, its future growth depends on not only building new centers, but filling them up with clients in an increasingly more competitive market. Then there is the fact that it has a concentrated client base made up of a few huge hyperscalers, so any changes to those relationships could pose a risk.
Image source: Getty Images.
Finally, it trades at an extremely high multiple, with an enterprise value-to-revenue ratio of 36. That means that the enterprise value, including market cap, debt, etc., is 36 times its revenue, which is a lot.
That's not to say Applied Digital isn't a promising company that will continue to grow, but if you are looking for a more reliable and established AI stock, consider Palo Alto Networks (PANW 0.22%).
NASDAQ: PANW
Key Data Points
AI driving revenue gains
Palo Alto Networks is the largest enterprise cybersecurity provider, meaning it provides mainly large organizations with the entire range of cybersecurity protections. The company was founded in 2005 and has almost a 10% market share in a pretty crowded field of competitors.
Most of its revenue, about 80%, comes from subscriptions to its software and support services, while its products, like firewalls, its original products, make up roughly 20%.
In the first quarter of 2026, Palo Alto Networks saw revenue climb 16% year over year. Perhaps a more important metric, next-gen security annual recurring revenue (ARR) grew 29% last quarter -- more than anticipated.
This next-gen security area is where the company is focusing its innovation and investment, as it includes software and cybersecurity for AI applications, including data centers.
Key acquisitions
Part of the reason that earnings per share in the last quarter was down 4% was because of 17% higher expenses and costs associated with two acquisitions -- CyberArk and Chronosphere. CyberArk will help with identity security, while Chronosphere will bolster the firm's AI security efforts.
These acquisitions, fueled by the AI revolution, are expected to lead to a spike in revenue. Palo Alto Networks anticipates $15 billion to $20 billion in ARR for fiscal year 2030 -- up from the current $5.9 billion.
The company is also preparing for the quantum computing revolution, partnering with IBM on a Quantum-Safe Readiness solution for enterprises.
"We're getting more and more optimistic on the arrival of quantum and expect it to be commercialized by 2029. As is widely known, quantum computing has the ability to break current encryption across technology stacks. Enterprises have less than five years to get their estates to quantum readiness," chairman and CEO Nikesh Arora said on the last earnings call.
Wall Street is bullish on Palo Alto Networks
The investments in AI and next-gen innovations took a bite out of earnings and may have led to a sell-off in the fall, as investors grew wary of too much AI investment and high stock valuations. Palo Alto Networks stock plummeted about 18% since late-October highs to the current $181 per share.
But that's good news for investors right now, as the high valuation has come down a bit. The stock is still trading at 47 times forward earnings, which is higher than the Nasdaq-100 average, but Wall Street analysts are bullish on the stock. It is rated a buy by 80% of analysts and has a median price target of $230 per share, which suggests a 27% return over the next 12 months.
Looking ahead, the company said its remaining performance obligations (RPO), contracts signed but not executed, grew 24% last quarter to $15.5 billion.
For fiscal 2026, the company projects revenue growth to be 14%, down a tad from 15% growth in fiscal 2025, while adjusted earnings per share growth will be slower at 13% compared to 18% last fiscal year. ARR is targeted for a 26% to 27% rise, also down slightly, while RPO growth will be 17% to 18%, also down a bit.
These slightly slower growth rates aren't a major concern, because the investments the company is making now should set Palo Alto Networks up for long-term growth as a critical player in the rise of AI or quantum computing.
There is a lot to like about Applied Digital, but Palo Alto has fewer variables, is cheaper, expects robust growth, and is setting itself up for future success.
