Motley Fool: Applied Digital may be 'primed for major breakout' amid data center boom

Mid cap Applied Digital, which builds and leases data centers, could be "primed for a breakout" thanks to unprecedented demand for AI infrastructure, Motley Fool contributor Keithen Drury argues in a new post. The risk for investors, however, is that the company remains unprofitable, while its share price depends heavily on demand for AI stocks. Applied Digital shares gained more than 7% on Tuesday to $28.85 apiece.

Data center developer Applied Digital is booming thanks to unprecedented demand for AI computing power, Drury writes. In its fiscal fourth quarter, ended May 31, the company’s revenue soared 407% year over year to $258.7 million. Full-year growth was more moderate, with revenue up 167% to $611.3 million.

Wall Street expects the figure to increase significantly over the next several years as more of the company’s sites under construction come online. The top line is expected to grow 37% in fiscal 2027 and 127% in fiscal 2028. “Those are exciting projections,” Drury notes. Amid what may be the biggest data center boom Applied Digital will ever experience, the company must move quickly, even if that means operating at a loss for several years, he continues.

He acknowledges that this makes the stock risky, “but if it comes out on the other side OK, it will be a great investment.” The market normally compensates for risk through valuation, with riskier stocks trading at lower valuations. That is also where the potential lies: higher-risk assets should deliver greater returns, albeit with a lower probability of success, he concludes.

The problem is that the market is betting that Applied Digital’s success is all but guaranteed, Drury reckons. The company is not yet profitable. The net loss widened 108% year over year to $110.6 million in the fiscal fourth quarter and 7% to $249.2 million for the full year.

The stock trades at a price/sales ratio of 13, which is not cheap, in Drury's view. Moreover, that valuation does not account for the fact that many of Applied Digital’s data centers will not come online for some time, he says. He thinks the company’s shares will likely rise and fall with demand for AI stocks, with the correlation persisting until Applied Digital turns a profit.

The stock has gained around 18% year to date, according to Yahoo Finance data. Wall Street is upbeat on the stock: it has 13 “buy” ratings versus a single “hold,” according to MarketWatch data. The average target price is $74 per share, implying 156% upside from Tuesday’s close.