McKinsey projects global data center investments will hit nearly $7 trillion by 2030, and every tech giant from Microsoft to Meta is scrambling to secure capacity. Applied Digital (APLD 1.67%) has positioned itself as a pure-play beneficiary of this megatrend, and the stock has exploded over the past 18 months.
But after digging into the financials and reading the fine print in their SEC filings, I'm staying far away. Despite the tailwinds at its back, three fundamental red flags make this stock far too risky for me.
Image source: Getty Images.
Red Flag 1: Applied Digital's debt is piling up fast
Applied Digital's debt exploded from $44 million in Q1 FY2024 to $2.6 billion by November 2025 and the company's debt-to-equity ratio now sits north of 125%. This debt is expensive, and while management believes it will be able to be refinanced to considerably lower rates once more of the company's facilities are constructed, I'm not convinced.
This debt is likely to grow and makes the risks of not executing significantly higher for Applied Digital compared to a less indebted company -- and remember, Applied Digital is operating in the red, losing $125 million in the last 12 months.
Red Flag 2: Applied Digital has a customer concentration problem
Applied Digital's HPC Hosting Business -- its name for the AI-first segment and the driver of Applied's incredible growth -- generates all of its current revenue and the bulk of its future revenue from just one company: CoreWeave.
This creates a major dependency on a single company. This is a risk for any company, but when that company is itself heavily indebted and operating at a considerable loss, it's a massive problem in my eyes.
Even if CoreWeave succeeds, if it decides to build its own capacity, looks for another partner, or attempts to renegotiate terms, Applied Digital has very little negotiating leverage. There's zero margin for error in that relationship.
Red Flag 3: Applied Digital's lease revenue is far from guaranteed
The whole narrative driving Applied Digital's stock higher rests on the $16 billion in revenue its leases will collectively generate over 15 years -- $11 billion of which comes from CoreWeave. Investors love the security of lease revenue as it is nearly guaranteed. But that's the key -- nearly.
To win CoreWeave's business, Applied Digital had to agree to lease terms that many companies would not, including the fact that CoreWeave has the right to walk away from the lease completely -- penalty-free -- if Applied Digital fails to complete construction in time.
NASDAQ: APLD
Key Data Points
The opportunity is big, but the risks are bigger
Yes, the bulls have a point: If the company delivers on construction timelines, maintains its CoreWeave relationship, successfully refinances, and can control its debt, there's legitimate upside here.
But as someone who's covered the AI infrastructure space for years, it's a tightrope walk in my eyes and one that I don't have a lot of faith in. I wouldn't own Applied Digital stock.
