Volatility in Applied Digital May Create an Entry Opportunity

October 11, 2024 at 07:15 AM EDT

Data center with server racks in a corridor room — Photo

Applied Digital Corp. (NASDAQ: APLD) stock has been volatile since it reported earnings after the market closed on October 9. After gaining 4% in after-hours trading, APLD stock moved sharply lower by 12.8% in pre-market trading. However, as of this writing, the stock is up about 6%, but that’s still about 4% below its October 9 closing price.

That may lead you to believe the company delivered a disappointing report. But that’s not the case. The company posted a 67% increase in revenue to $60.7 million. This comes after the prior quarter, in which the company posted a year-over-year revenue increase of nearly 100% from $22 million to $43.7 million. And, while not profitable, Applied Digital’s loss of 15 cents per share was much lower than the 29 cents per share loss expected by analysts.

More than likely, the extreme price action is due to high-speed trading programs reacting to the earnings report as well as the latest reading on the Consumer Price Index (CPI), which came in slightly hotter than expected.

There could also be an element of profit-taking. APLD stock is up 147% in the last six months and over 14% in the month before earnings.

Much of that move came after the announcement that Applied Digital received $160 million in financing from multiple companies, including NVIDIA Corp. (NASDAQ: NVDA). That could also introduce a sell-the-news element to the price action.

And adding complexity to an investor’s desire for simple answers, it’s important to note that short interest in APLD stock was up 9.4% in the month prior to earnings.

To assess whether this is a buying opportunity, it’s a good idea to take a step back and examine what the report says or doesn’t say about Applied Digital.

Applied Digital Is About the Future of AI

Applied Digital designs, develops and operates data centers in North America. The company was formerly known as Applied Blockchain but has changed its name to reflect its focus on the data center space.

Data centers became important with the rise of cloud computing. The demand for data storage created by generative AI is driving exponential growth in the sector.

According to IndustryARC, the data center market size is expected to reach $418 billion by 2030. If those growth estimates are correct, that would be a compound annual growth rate (CAGR) of 9.6%.

When you consider that kind of growth potential and combine it with the millions being invested in Applied Digital, the company would seem to be a clear-cut winner among technology stocks. But that’s where some investors have concerns.

Is Hyperscale Just Hype?

An important trend that will drive data center growth will be the increased demand for hyper-scalability. This means the ability for data centers to scale resources quickly and efficiently to accommodate expanding data volumes and advanced technical applications (e.g. generative AI).

Applied Digital was in the process of finalizing a lease with a U.S.-based hyperscaler. However, on the earnings call, the company announced that the exclusivity part of the lease would not be renewed.

That doesn’t mean much by itself. Applied Digital CEO Wesley Cummins confirmed that the lease, which will be for 100 megawatts, is in the final stages of approval. The company also said that the lease would include a reservation from the same company for an additional 300 megawatts. Applied Digital also said it is seeing growing demand from hyperscalers for capacity in 2025 and 2026.

Analysts Remain Bullish on Applied Digital

Taking a step back, it’s important for investors to remember that Applied Digital is still a small-cap company. It’s market capitalization as of this writing is $961.84 million. Small-caps continue to be under pressure. And that’s particularly true of companies that are not profitable like Applied Digital.

However, analysts remain bullish on the company. The Applied Digital analyst forecasts on MarketBeat show that three analysts have weighed in on the company post earnings. All three analysts reiterated a Buy rating on APLD stock with price targets between $10 and $12. The highest target came from Craig Hallum, which increased its price target to $12 from $10.

As for getting involved, the APLD stock price is showing solid support around $7 per share so traders hoping for a bigger dip may be disappointed. But there may still be an opportunity for investors willing to buy and hold the stock.

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Volatility in Applied Digital May Create an Entry Opportunity

Applied Digital Is About the Future of AI

Is Hyperscale Just Hype?

Analysts Remain Bullish on Applied Digital

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