Is Applied Digital Stock an Undervalued AI Stock to Buy? | APLD Stock Analysis

SUMMARY

Parkev Tatevosian, CFA, examines Applied Digital Corporation's recent stock performance and evaluates whether it is an undervalued opportunity in the booming AI sector. The analysis considers the company's financial outlook, risk profile, and current valuation to determine its investment potential.

MAIN POINTS

• Applied Digital Corporation's share price has declined nearly 20% over five days despite strong year-to-date gains. [0:00]
• Hyperscalers are reaching spending limits, potentially increasing demand for companies like Applied Digital to provide AI computing capacity through rental agreements. [1:00]
• Projections suggest Applied Digital will reach break-even in 2028 and generate $850 million in free cash flow by 2029, with significant growth expected through 2035. [2:01]
• The company's business model involves high upfront capital expenditures and long-term revenue recovery, presenting risks if future demand does not meet expectations. [3:02]
• Applied Digital's weighted average cost of capital is estimated at 19.81%, reflecting high risk, with a market cap over $11 billion and total debt exceeding $2.7 billion. [4:01]
• The intrinsic value per share is calculated at just over $35, close to the current market price, leading to a hold rating as the stock appears fairly valued rather than undervalued. [6:00]

DETAILED ANALYSIS

Applied Digital Corporation has experienced notable volatility, with its stock price dropping nearly 20% over the past five days but maintaining a strong year-to-date increase of over 58%. This movement reflects the broader enthusiasm and uncertainty in the AI sector, where demand for computing power continues to surge. Applied Digital, along with peers such as Coreweave, IREN, and Nebius Group, stands to benefit as large hyperscalers approach the limits of their capital expenditure budgets and increasingly turn to renting rather than building AI infrastructure.

This shift is expected to accelerate from 2027 onward, potentially driving significant new business for companies specializing in AI computing capacity.

Financial projections for Applied Digital indicate that the company is likely to reach break-even status in 2028, transitioning to positive free cash flow of $850 million in 2029. By 2035, free cash flow is forecasted to rise to $6.3 billion, suggesting robust long-term growth potential. However, the company's business model involves substantial upfront investment in infrastructure, with returns realized incrementally over long-term leasing agreements, such as recent 15-year data center deals.

This structure introduces considerable risk, particularly if demand for AI computing capacity does not continue to grow as anticipated after initial contracts expire.

A key concern for investors is Applied Digital's high weighted average cost of capital, calculated at 19.81%. This figure incorporates an after-tax cost of debt of 11.5%, a cost of equity of 22.5% (based on a reduced beta of 3 from the reported 5.64), and a risk-free rate of 4.5%. The company's capital structure is estimated at 25% debt and 75% equity, with a market capitalization exceeding $11 billion and total debt over $2.7 billion.

Using these assumptions, the intrinsic value per share is estimated at just over $35, compared to a current market price slightly above $38. This close alignment suggests that the stock is fairly valued, rather than undervalued or overvalued, especially when considering the elevated risk profile. As a result, a hold rating is assigned, reflecting a cautious stance amid ongoing industry growth and volatility.

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