The race to secure AI compute capacity is intensifying, and Applied Digital Corporation (APLD) stands at the crossroads of opportunity and risk. While its stock has been pummeled by near-term operational headwinds, the company’s Ellendale HPC campus—a 1 gigawatt-scale data center complex in North Dakota—and its strategic pivot away from cloud services present a compelling long-term story. For investors willing to look past short-term volatility, APLD could be a rare play on the secular boom in artificial intelligence infrastructure. Let’s dissect the catalysts and risks.
The Ellendale Advantage: Leverage on AI’s Insatiable Appetite for Compute
Applied Digital’s Ellendale HPC campus is its crown jewel. The facility, now rebranded as Polaris Forge 01, is locked into two 15-year leases with CoreWeave, an AI hyperscaler, for 250 megawatts of compute capacity. These agreements alone guarantee $7 billion in contracted revenue over the lease term—a staggering $467 million annually. With an option to expand to 400 MW and eventual 1 GW scalability, Ellendale’s potential revenue stream could grow exponentially.
The campus’s design is optimized for AI’s unique needs:
– Low-cost energy: North Dakota’s stranded power (including renewables) reduces electricity costs by ~$60 million annually per 100 MW.
– Free cooling: 220+ days of sub-ambient temperatures eliminate the need for traditional cooling systems, achieving a PUE of 1.18 (well below the industry average of 1.6).
– Strategic partnerships: Applied Digital’s collaboration with Nvidia—including a $160M private placement to fund GPU infrastructure—ensures access to cutting-edge hardware like H100 chips.
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The recent selloff has driven APLD to $9.66—a 7.5% decline from its June high—despite these tailwinds. This disconnect creates an entry point if leases materialize as planned.
Ask Aime: How can Applied Digital’s Ellendale HPC campus benefit from AI’s insatiable compute demands?
Divesting for Focus: The Cloud Services Exit
Applied Digital’s decision to divest its Cloud Services division is a critical strategic move. While this segment contributed ~$55M in the first nine months of 2025 (one-third of total revenue), it was a drain on capital and a distraction. The division’s 36% sequential revenue drop in Q3 and conflicts of interest with hyperscaler clients made the move necessary.
The benefits are clear:
1. Simplification: Shifting to a REIT-like model (focusing on data center leasing) could unlock higher valuation multiples. REITs trade at ~15x FCF vs. APLD’s current 10.4x.
2. Debt Reduction: Proceeds from the sale (potentially $500M+) could chip away at its $1 billion debt pile.
3. Hyperscaler Appeal: Without competing in cloud services, APLD becomes a neutral landlord—a more attractive partner for Amazon, Google, or Microsoft.
Valuation: A Discounted Play on AI’s Future
Applied Digital’s valuation metrics are starkly mixed:
– EV/Sales: 14.79 (high, but comparable to peers like Equinix at 12.4)
– Debt/EBITDA: 16.17 (extremely elevated, but declining with Ellendale’s cash flows)
The key is to separate short-term pain from long-term gain. The $5B perpetual equity facility from Macquarie and $375M SMBC financing provide runway to execute. Analysts see a 30.8% upside to $12.64, but bulls argue that a successful Ellendale leasing cycle could push this higher.
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While its bankruptcy risk (Z-Score of 0.09) is alarming, the Ellendale leases’ cash flows could flip this narrative.
Risks: Debt, Execution, and Market Timing
- Debt Overhang: The $925M net debt position is a Sword of Damocles. Missed leases or delayed construction could worsen liquidity.
- Leasing Delays: The CoreWeave agreements are in place, but securing additional hyperscalers (e.g., Microsoft’s prior withdrawal) remains a hurdle.
- Divestiture Uncertainty: The Cloud Services sale’s timing and proceeds are unknown. A fire sale could depress near-term cash flows.
Investment Thesis: A High-Reward, High-Risk Bifurcation
Applied Digital is a binary bet:
– Upside: If Ellendale’s leases are fully executed and Macquarie’s financing reduces leverage, APLD could re-rate to $15–$20+ as an AI infrastructure leader.
– Downside: Persistent cash burn, lease misses, or a failed divestiture could send it to $2–$4.
APLD Free Cash Flow, Free Cash Flow YoY
Final Verdict: A Speculative Buy with a Catalyst-Driven Upside
The stock’s current price reflects its near-term pain but not its long-term potential. For aggressive investors, APLD is a speculative buy with a 12–18 month horizon. Key catalysts include:
1. Leasing Announcements: Hyperscaler deals beyond CoreWeave by end-2025.
2. Divestiture Completion: Unlocking capital and reducing complexity by mid-2026.
3. Macquarie’s Equity Infusion: Reducing reliance on debt.
Positioning Advice:
– $9.66 entry: Allocate 2–3% of a speculative portfolio.
– Stop-loss: Below $7.50 (20% downside).
– Target: $15 (60% upside) by 2026 if leases materialize.
In the AI infrastructure arms race, Applied Digital is a company with asymmetric risk-reward: its valuation is depressed, its assets are strategic, and its partnerships are game-changing. The question is whether the market will look past today’s pain to tomorrow’s payoff.