Motley Fool says wait to buy Applied Digital until it delivers more data centers

Investors should hold off on buying shares of mid-cap data center builder and landlord Applied Digital, Motley Fool contributor Daniel Sparks argues in a new post. The company has signed approximately $36 billion of 15-year leases but will not collect a cent until construction is completed, he explains.

It is worth waiting to buy Applied Digital stock because the company will not begin collecting rent on space at its AI data centers under construction for some time, Sparks writes. The company has signed contracts totaling around $36 billion. Five campuses are being built for cloud platform CoreWeave and two unnamed companies. Each lease runs for 15 years, with renewal options, on a take-or-pay basis (the tenant owes the rent whether or not it uses the space).

The catch is that, under the lease terms, payments begin only after construction is completed and the facilities enter service, Sparks points out. As of the end of July, only 175 MW of the 1,410 MW under contract was operational, according to the company’s latest update.

For Applied Digital’s fiscal 2026, ended May 31, revenue rose 167% to $611.3 million. But only $99.8 million of that came from base rent, Sparks notes. After reviewing the data center builder’s schedule of minimum lease payments, he calculated that Applied Digital will receive $451 million from this business in fiscal 2027, $1.45 billion in fiscal 2028, and $2.25 billion in fiscal 2029. For now, the company is incurring construction costs.

Sparks also cites the stock's multiples. Applied Digital has a market capitalization, as of Friday (U.S. markets were closed Monday), of $7.5 billion. That is 12 times its fiscal-2026 top line and more than three times the annual rent the completed portfolio is contracted to generate, he notes. He believes this valuation assumes years of construction proceeding without a hitch. But he notes that large projects can be delayed. The management itself warned in the annual report that significant delays could give tenants the right to terminate their leases.

Sparks advises investors to monitor Applied Digital’s progress in bringing its data centers online and take another look at the stock if the company continues to meet its deadlines.

Wall Street takes a different view: 13 analysts recommend Applied Digital at "buy," while only one rates it a "hold." The consensus target price for the stock is almost $74 per share, implying 180% upside from the last close. The name is up 7.5% year to date.

The company’s business is booming thanks to unprecedented demand for AI computing, Motley Fool contributor Keithen Drury wrote in a previous post. He acknowledged that investing in the stock is risky, but that is also where its potential lies. Higher-risk assets should deliver greater returns, albeit with a lower probability of success, he noted.