Applied Digital currently trades at $10.13 and has been a dream stock for shareholders. It’s returned 13,300% since July 2020, blowing past the S&P 500’s 94% gain. The company has also beaten the index over the past six months as its stock price is up 13.8% thanks to its solid quarterly results.
Is now the time to buy Applied Digital, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Applied Digital Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Applied Digital. Here are three reasons why you should be careful with APLD and a stock we'd rather own.
1. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Applied Digital’s earnings losses deepened over the last two years as its EPS dropped 103% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Applied Digital’s demanding reinvestments have drained its resources over the last four years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 211%, meaning it lit $210.74 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Applied Digital burned through $694.5 million of cash over the last year, and its $993.7 million of debt exceeds the $68.74 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Applied Digital’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Applied Digital until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Applied Digital’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 17.5× forward EV-to-EBITDA (or $10.13 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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