An analyst advised postponing the purchase of shares in Applied Digital, a data center builder

Investors should hold off on buying shares of Applied Digital, a mid-cap company that builds and leases data centers, according to Daniel Sparks, a freelance analyst for The Motley Fool. Applied Digital has signed 15-year lease agreements worth approximately $36 billion, but won’t receive a single cent until construction is complete, he explains.

It’s not yet time to buy Applied Digital stock, since the company won’t be receiving rent for the leased space in its data centers—which are currently under construction for artificial intelligence purposes—for quite some time, Sparks writes.

The company has signed contracts totaling approximately $36 billion. Five campuses are being built for the CoreWeave cloud platform and two unnamed companies. Each contract is for 15 years, with the option to extend it on a “take-or-pay” basis. This means that the tenant is obligated to make payments regardless of whether they use the space or not, Sparks explains.

The analyst points out that, according to the lease terms, revenue will begin only after construction is completed and the facilities are put into operation. As of the end of July, according to the company’s updated data, only 175 MW of the contracted 1,410 MW had been commissioned.

For fiscal year 2026, which ended for Applied Digital on May 31, the company’s revenue grew by 167% to $611.3 million. However, only $99.8 million of that amount comes from base rent payments, according to Sparks. After examining the data center builder’s minimum lease payment schedule, he calculated that: in fiscal year 2027, Applied Digital will receive $451 million from this line of business, $1.45 billion in 2028, and $2.25 billion in 2029. For now, however, the company is only incurring construction costs, the article states.

Sparks also draws attention to the price-to-earnings ratio at which Applied Digital’s shares are trading. Its market capitalization on August 4 (U.S. stock exchanges were closed on August 7) stood at $7.5 billion. This is 12 times the revenue for fiscal year 2026 and three times the annual rent for the existing portfolio of properties, the analyst notes.

He believes that this estimate takes into account years of uninterrupted construction. However, he notes that large-scale projects can be delayed. The company itself warned in its annual report that significant delays could give tenants the right to terminate their leases.

Sparks advises investors to keep an eye on how Applied Digital brings its data centers online and, if the company meets its deadlines, to take another look at its stock.

Wall Street, on the whole, takes a different view: 13 analysts recommend buying Applied Digital stock, while only one recommends holding it.

The company's business is thriving thanks to unprecedented demand for AI computing, wrote Motley Fool contributing analyst Katen Drury. He acknowledged that investing in its stock is risky, but that is precisely where the potential lies. Higher-risk assets should yield higher returns, albeit with a lower probability of success, he noted.

Wall Street's average price target for Applied Digital shares is nearly $74, which is 180% higher than the stock's most recent closing price. Year-to-date, the stock is up 7.5%.