Investors have been running into Applied Digital Corp (NASDAQ: APLD) in recent sessions after the digital infrastructure solutions company inked a $7 billion hosting agreement with CoreWeave Inc (NASDAQ: CRWV).
APLD’s deal with the Nvidia-backed startup marks a turning point, given its prior struggles in terms of monetising its rapidly expanding GPU infrastructure.
CRWV’s commitment does help with addressing one of the firm’s most pressing concerns: securing customers for its new capacity, particularly for its underutilized Ellendale facility.
However, it doesn’t resolve broader concerns surrounding the company’s long-term profitability, capital intensity, and valuation.
Note that Applied Digital stock has rallied past $13 on the back of the CoreWeave announcement and is now up more than 300% versus its year-to-date low.
Heavy capex could hurt Applied Digital stock
While the CRWV agreement improves short-term visibility into Applied Digital’s future revenue and lends credibility to its GPU cloud ambitions, investors are advised to exercise caution in buying its shares at current levels.
Why? Partially because the company based out of Dallas, TX has plans of investing as much as $50 million per month over the next year-and-a-half.
That’s substantial for a business that generated just $166 million in revenue last year.
The risk here is: even with CoreWeave as an anchor tenant, the firm’s remaining excess capacity will weigh on gross margins unless additional customers are secured.
In its latest reported quarter, APLD’s Cloud Services segment suffered a nearly $36% sequential revenue decline, largely due to technical issues related to transitioning from single-tenant to multi-tenant models.
While these issues have reportedly been resolved, the volatility raises questions about operational execution at scale.
Plus, depreciation expenses are increasing, driven by newly completed facilities that have yet to produce matching revenue, creating a lag effect that could compress earnings even as top-line revenue improves, which may also weigh on APLD shares over the next 12 months.
APLD’s share valuation is a major concern
Investors should consider pulling out of the AI stock following the recent rally because even after factoring in the CoreWeave deal, it looks overvalued at the current price of more than $13.
A conservative estimate for the company’s forward price-to-sales at the time of writing is nearly 6x, including the CRWV benefit, which is significantly lofty compared to the industry average of about 3.5x only.
More importantly, the said valuation metric sits well above APLD shares’ own 5 year median P/S of less than 2x.
Finally, given CoreWeave’s likely need for competitive pricing in its contracts, it’s unclear whether the deal will significantly improve Applied Digital’s net margins or just boost its top-line figure.
In conclusion, with a market cap now approaching $3 billion and no sustained profitability in sight, Applied Digital stock needs near-perfect execution in a rapidly evolving, capital-heavy sector. That’s a tall order, even with CRWV on board.
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