Is Applied Digital (APLD) Stock the Next Big AI Play?

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Digital infrastructure specialist Applied Digital (NASDAQ:APLD) — which focuses on next-generation data centers to undergird the rapidly expanding high-performance computing (HPC) industry — is making headlines on Friday. Specifically, the firm just inked a deal with an artificial intelligence (AI) customer through wholly owned subsidiary Sai Computing. This announcement is failing to move APLD stock positively, however. Shares are down more than 15% as of this writing despite the stock’s otherwise strong analyst support.

According to an accompanying press release, Applied Digital’s Sai Computing recently launched a business unit called AI Cloud Service. The aforementioned new customer represents its second AI-related client. Further, the new agreement is worth up to $460 million over a 36-month period. For reference, APLD stock currently has a market capitalization of just under $800 million.

Applied Digital Chairman and CEO Wes Cummins said the following about the deal:

“This agreement marks another milestone in APLD’s HPC/AI Infrastructure growth trajectory as we continue to strategically expand our focus on artificial intelligence cloud services in addition to our next-generation datacenters […] As the AI industry continues to grow at unprecedented levels, we continue to see extraordinary demand for our new cloud service as a result.”

First announced back in May, AI Cloud Service seeks to “provide high-performance computing power for AI applications.” Its first sector-related customer signed an agreement worth up to $180 million over a 24-month period.

APLD Stock Presents a Promising But Risky Prospect

Fundamentally, this news highlights Applied Digital’s ambitions for AI utility. On paper, it’s a wise move that over time should theoretically bring intrigue to APLD stock.

According to Grand View Research, the global AI market size reached a valuation of $136.55 billion in 2022. Analysts estimate that the sector could expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030. At the culmination of that forecast period, the AI industry should command revenue of over $1.81 trillion. Obviously, that’s a lucrative backdrop for APLD stock.

Further, Allied Market Research states that, back in 2020, the global data center market size reached a value of $187.35 billion. Moreover, experts predict that this segment alone could hit $517.17 billion by 2030. Therefore, Applied Digital enjoys multiple high-value marketplaces.

At the same time, however, APLD presents some incredible risks. Just look at Friday’s price action. Likely, today’s pensiveness is focused on financial viability. For one thing, Applied Digital doesn’t offer the greatest read in terms of balance sheet stability. Its Altman Z-Score also sits at 2.26, which ranks in the “grey” zone for risk.

To be sure, the company’s trailing 12-month (TTM) revenue stands at $40.88 million, far higher than the $8.55 million posted for the fiscal year ended May 2022. However, the number of shares outstanding also skyrocketed in fiscal 2022 and has continued to rise. Therefore, its three-year revenue growth rate on a per-share basis has also fallen.

Analysts Still Support Applied Digital

Despite some questionable financial stats, Wall Street analysts still support APLD stock. On TipRanks, the stock carries a unanimous “strong buy” view among seven experts. The average analyst price target currently lands at $10.72, implying more than 30% upside potential.

On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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