Applied Digital (APLD)

Digital infrastructure provider Applied Digital (NASDAQ:APLD) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 22.1% year on year to $52.92 million. Its non-GAAP loss of $0.08 per share was 22% 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 performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $221.2 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’s 287% annualized revenue growth over the last three years was incredible. This shows it had high demand, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. Applied Digital’s annualized revenue growth of 133% over the last two years is below its three-year trend, but we still think the results suggest healthy demand.

This quarter, Applied Digital generated an excellent 22.1% year-on-year revenue growth rate, but its $52.92 million of revenue fell short of Wall Street’s high expectations.

Looking ahead, sell-side analysts expect revenue to grow 67.3% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is admirable and indicates the market is forecasting success for its products and services.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Applied Digital’s high expenses have contributed to an average operating margin of negative 48.5% over the last four 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 over the last four 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 35.8% operating margin. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Applied Digital’s earnings losses deepened over the last two years as its EPS dropped 103% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.

In Q1, Applied Digital reported EPS at negative $0.08, up from negative $0.24 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Applied Digital’s full-year EPS of negative $0.65 will reach break even.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Applied Digital’s demanding reinvestments have drained its resources over the last four years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 211%, meaning it lit $210.74 of cash on fire for every $100 in revenue.

Taking a step back, an encouraging sign is that Applied Digital’s margin expanded during that time. In light of its glaring cash burn, however, this improvement is a bucket of hot water in a cold ocean.

Applied Digital burned through $251.6 million of cash in Q1, equivalent to a negative 475% margin. The company’s cash burn increased from $2.33 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 $694.5 million of cash over the last year, and its $993.7 million of debt exceeds the $222.9 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 great to see Applied Digital beat past analysts’ EPS expectations this quarter. On the other hand, its revenue and EBITDA missed significantly, making this a tough quarter. Shares traded down 6.2% to $5.04 immediately following the results.

Updated: July 10, 2025 at 11:54 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Applied Digital, you should also grasp the company’s longer-term business quality and valuation.

Applied Digital is a pretty decent company if you ignore its balance sheet. To kick things off, its revenue growth was exceptional over the last three years. And while its declining EPS over the last two years makes it a less attractive asset to the public markets, its rising cash profitability gives it more optionality. On top of that, 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 16.2x. Certain aspects of its fundamentals are attractive, but we aren’t investing at the moment because its balance sheet makes us uneasy. We think a potential buyer of the stock should wait until the company’s debt falls or its profits increase.

Wall Street analysts have a consensus one-year price target of $14.61 on the company (compared to the current share price of $9.36).