Applied Digital's Earnings Miss Exposes Cost Overruns and Validates DeepValue Risk Concerns

What happened

Applied Digital's fiscal Q2 revenues surged 250% year-over-year, driven by HPC tenant fit-outs at Polaris Forge 1, but earnings missed estimates due to higher costs, highlighting ongoing cash burn. This aligns with the DeepValue report's warning about aggressive capex, with free cash flow at -$331.4 million in the latest quarter, underscoring the company's capital-intensive build-out phase. The revenue growth is heavily concentrated on a single tenant, CoreWeave, amplifying credit risks that could jeopardize future contracted cash flows of $10.85 billion. Despite the top-line increase, Applied Digital remains unprofitable with negative EBIT, and the stock's premium valuation near $30 assumes flawless execution without a margin of safety. Therefore, the earnings miss reinforces the critical view that investor optimism is disconnected from underlying financial vulnerabilities.

Implication

Investors must recognize that the revenue surge is not translating to profitability, indicating the company remains in a high-investment phase with no near-term cash flow relief. Dependence on CoreWeave exposes Applied Digital to tenant credit deterioration, which could force lease renegotiations and impair the value of its AI campus backlog. With negative free cash flow and high leverage, refinancing the $375 million SMBC loan due in August 2026 poses a significant risk, potentially requiring dilutive equity issuance. The stock's current price embeds optimistic assumptions about on-time delivery and tenant performance, leaving little room for error amid construction and funding uncertainties. Consequently, maintaining a defensive stance or trimming positions is prudent until sustainable cash flow generation and reduced concentration are demonstrably achieved.

Thesis delta

The Q2 earnings miss does not alter the core investment thesis but sharpens the focus on execution risks and cost overruns highlighted in the DeepValue report. It underscores that revenue growth alone is inadequate to justify the valuation without meaningful improvements in profitability and cash flow discipline. Investors should prioritize monitoring construction timelines, tenant credit metrics, and refinancing progress as critical near-term catalysts for any thesis shift.