Applied Digital's 18% Surge Masks Deep Financial Risks Amid AI Hype

What happened

Applied Digital's stock surged 18% to $37.68 on January 9, 2026, driven by a 250% year-over-year revenue growth announcement in its fiscal Q2 earnings, primarily from the HPC hosting segment. However, this segment remains unprofitable with a $2.6 million loss on $85 million revenue, and consolidated operations posted a $31 million loss. The DeepValue report highlights severe underlying issues, including $2.6 billion in high-coupon debt, negative interest coverage of -2.1x, and free cash flow of -$568 million due to aggressive capex. Execution risks loom large, with the company reliant on delivering 600MW of data centers on time while sharing economic benefits with partners like Macquarie. At the current price, the stock trades above the report's base case valuation of $28, indicating market optimism may be overlooking fundamental weaknesses.

Implication

The revenue spike, while notable, fails to address core profitability concerns, as the HPC segment remains loss-making and consolidated earnings are negative. High debt servicing costs from 9.25% notes and Macquarie preferred equity could absorb future cash flows, capping equity returns even if growth continues. Any construction delays or counterparty issues with CoreWeave or the hyperscaler could trigger a sharp re-rating towards the bear case value of $20, given the crowded and volatile AI narrative. The current valuation at $37.68 assumes near-perfect execution, yet the DeepValue report's base case of $28 factors in more realistic financing and operational hurdles. Therefore, investors might consider reducing exposure or awaiting clearer signs of margin improvement and debt coverage before committing new capital.

Thesis delta

The surge confirms the DeepValue report's view that investor sentiment is overly focused on top-line growth while ignoring persistent losses and leverage. No material shift in the thesis is justified, as the financial risks and execution challenges remain unchanged, with the key delta being increased market euphoria that heightens vulnerability to negative catalysts. Investors should maintain a skeptical stance, as the stock's move above the base case valuation exacerbates asymmetric downside risk.