Applied Digital's AI Factory Groundbreaking Drives Stock Surge, Yet Financial Risks Loom Large

What happened

Applied Digital's stock rose 8.49% to $37.69 after the company announced it had broken ground on a new AI factory, reflecting ongoing market enthusiasm for AI infrastructure demand. This positive reaction follows a 300%+ share price surge over the past year, fueled by multi-billion-dollar hyperscaler leases with CoreWeave and an investment-grade tenant. However, recent SEC filings reveal that the company operates with high leverage, including $2.6 billion in net debt and a capital structure that heavily favors Macquarie's preferred equity at a 12.75% coupon. The HPC segment remains loss-making, with free cash flow negative $568 million last quarter due to aggressive construction spending, indicating profitability is distant. Despite the headline growth, over $12.3 billion of its $15.6 billion lease backlog is deferred beyond 2030, exposing common equity to significant execution and financing risks.

Implication

The stock's jump highlights market optimism for AI infrastructure, but it does not address core risks like tenant concentration, construction delays, or expensive capital that could erode equity returns. Applied Digital must successfully execute on its Polaris campuses and secure additional financing without dilution to justify its current valuation. Monitoring key milestones, such as signing a 900MW hyperscaler deal and achieving positive free cash flow by late 2026, is critical for assessing viability. Given the negative earnings and crowded AI infrastructure trade, any misstep could trigger a sharp de-rating toward the DeepValue report's base case of $32 per share. Thus, while the news reinforces the growth narrative, it does not alter the need for a defensive investment approach until financial sustainability is proven.

Thesis delta

The breaking ground on a new AI factory is a positive operational step but does not materially shift the investment thesis, which remains centered on high leverage and negative cash flow. The DeepValue report's 'POTENTIAL SELL' rating stands, as the news fails to address risks like Macquarie's preferred equity draining economics or back-loaded lease payments. A thesis upgrade would require evidence of reduced financial strain, such as sustainable free cash flow generation or improved capital terms, which this development alone does not provide.