Applied Digital (APLD)

Digital infrastructure provider Applied Digital (NASDAQ:APLD) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 5.8% year on year to $64.22 million. Its non-GAAP loss of $0.03 per share was 80.6% above analysts’ consensus estimates.

Company Overview

Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ:APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.

The Enterprise Networking subsector is poised for growth as businesses accelerate cloud adoption, AI-driven network automation, and edge computing deployments. While these seem like big, nebulous trends, they require very real products and services like switches, firewalls, and datacenter hosting services. On the other hand, challenges on the horizon include intensifying competition from cloud-native networking providers, regulatory scrutiny over data privacy and cybersecurity, and potential supply chain constraints for networking hardware. While AI and automation will enhance network efficiency and security, they also introduce risks related to algorithmic bias, compliance complexity, and increased energy consumption.

Applied Digital's competitors in the cloud services and HPC hosting markets include specialized AI infrastructure providers like CoreWeave, Crusoe Energy, and Lambda Labs, as well as traditional data center operators such as Digital Realty and Equinix. In the blockchain hosting segment, the company competes with Core Scientific, Bitdeer Technologies Group, and Riot Platforms.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $219 million in revenue over the past 12 months, Applied Digital is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Applied Digital grew its sales at an incredible 262% compounded annual growth rate over the last three years. This shows it had high demand, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Applied Digital’s annualized revenue growth of 60.7% over the last two years is below its three-year trend, but we still think the results suggest healthy demand.

This quarter, Applied Digital reported year-on-year revenue growth of 5.8%, and its $64.22 million of revenue exceeded Wall Street’s estimates by 17.6%.

Looking ahead, sell-side analysts expect revenue to grow 53.9% over the next 12 months, a deceleration versus the last two years. Still, this projection is admirable and suggests the market is baking in success for its products and services.

Applied Digital’s high expenses have contributed to an average operating margin of negative 46.8% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, Applied Digital’s operating margin rose by 29.7 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

This quarter, Applied Digital generated a negative 34.7% operating margin.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Applied Digital’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 271%, meaning it lit $270.86 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Applied Digital’s margin dropped by 54.3 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Applied Digital burned through $331.4 million of cash in Q3, equivalent to a negative 516% margin. The company’s cash burn increased from $130.7 million of lost cash in the same quarter last year.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Applied Digital burned through $997.8 million of cash over the last year, and its $700.2 million of debt exceeds the $73.91 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Applied Digital’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Applied Digital until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

It was good to see Applied Digital beat analysts’ revenue and EPS expectations this quarter. On the other hand, adjusted EBITDA missed and operating margin worsened from the same period last year. Zooming out, we think this was a mixed print. The stock remained flat at $29.00 immediately after reporting.

Updated: December 3, 2025 at 11:15 PM EST

Before investing in or passing on Applied Digital, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Aside from its balance sheet, Applied Digital is a pretty decent company. First off, its revenue growth was exceptional over the last three years. And while Applied Digital’s projected EPS for the next year is lacking, its expanding adjusted operating margin shows the business has become more efficient.

Applied Digital’s EV-to-EBITDA ratio based on the next 12 months is 70.1x. All that said, we aren’t investing at the moment because its balance sheet makes us balk. If you’re interested in buying the stock, wait until its debt falls or its profits increase.

Wall Street analysts have a consensus one-year price target of $43.70 on the company (compared to the current share price of $29.22).