Applied Digital's Cloud Spin-Off Masks Persistent Financial Weaknesses

What happened

Applied Digital announced plans to spin off its cloud business by combining it with Ekso Bionics to form a new entity called ChronoScale. This move aligns with the company's prior disclosure that the cloud unit was held for sale, aiming to sharpen focus on AI and HPC data center operations. However, the spin-off does little to address Applied Digital's deep structural losses, negative operating cash flow, and heavy leverage, which are central to the strong sell thesis. The company remains reliant on external funding for its ambitious Polaris Forge build-outs, with execution risks and tenant concentration unchanged. Despite the stock's rise on the news, investors should critically assess whether this corporate action meaningfully improves the fragile financial profile.

Implication

The spin-off could free minimal capital and management attention, but it is unlikely to materially reduce the company's $869 million debt or improve negative interest coverage. Applied Digital's valuation, at a P/E of -25x and EV/EBITDA of -80x, remains speculative and disconnected from its loss-making operations. Investors should scrutinize whether any proceeds are used for balance-sheet de-risking or are consumed by ongoing construction costs, which totaled $249 million last quarter. This move does not address key watch items such as cash-flow inflection or tenant diversification beyond CoreWeave, critical for long-term sustainability. Until there is demonstrable improvement in operating cash flow and leverage metrics, the strong sell recommendation from the DeepValue report remains intact.

Thesis delta

The spin-off announcement does not materially shift the investment thesis, as Applied Digital's core financial weaknesses—including structural losses, high leverage, and execution risks—remain unaddressed. If executed successfully, it might provide minor capital relief or simplify operations, but without fundamental improvement in cash flow or balance-sheet health, the overall risk profile is unchanged. Therefore, no adjustment to the strong sell stance is warranted based on this news alone.