Applied Digital (NASDAQ: APLD), a builder of big data centers, has been a major beneficiary of the artificial intelligence (AI) boom over the past few years. It originally rented out its centers to Bitcoin miners and other blockchain firms, but it pivoted toward serving the high-performance computing, AI, and machine learning markets in late 2022.
Applied Digital stock went public at $5 on April 13, 2022, and its share price set an all-time high of $12.48 on Feb. 21, 2025. But over the two months that followed, the price plummeted nearly 70% to less than $4 as the Trump administration's unpredictable tariff policies, the escalating trade war, and other macroeconomic headwinds curbed the market's appetite for higher-growth AI stocks.
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With a market cap of $888 million, Applied Digital now looks reasonably valued at 4 times this year's projected sales. Could it be a great under-the-radar play on the AI market?
How does Applied Digital make money?
Applied Digital didn't originally build any servers or run any of its own cloud services. It simply built or bought big data centers, made sure they were powered, and rented out its rack space to AI and cloud companies that installed their own servers.
So like Digital Realty Trust(NYSE: DLR), Equinix(NASDAQ: EQIX), and other data center developers, Applied Digital seemed more like a real estate company instead of a tech company. But in 2023, it launched a new subsidiary, Sai Computing, to provide its own cloud-based AI services powered by Nvidia's latest GPUs.
Why is it changing its business model?
With Sai, Applied Digital believed it could launch its own cloud services for AI applications on top of its own data center infrastructure, but that strategic shift was odd for three reasons. First, it costs a lot of money to build your own servers, secure a steady supply of Nvidia's GPUs, and run your own cloud services.
Second, Applied Digital positioned itself as a competitor to its own clients -- which include Amazon, Microsoft, and other public cloud and AI leaders. Lastly, it seemingly contradicted its own plan to evolve into a real estate investment trust (REIT), which would require that it pay out at least 90% of its pre-tax profits as dividends to maintain a favorable tax rate. It still isn't profitable on a generally accepted accounting principles (GAAP) basis. Ramping up its spending on expensive GPUs and servers would keep its bottom line deep in the red.
In the first nine months of fiscal 2025 (which ended this February), Applied Digital's total revenue rose 46% year over year to $177 million. Its cloud services revenue surged 487% to $71 million, but its data center hosting revenue fell 3% to $106 million as it lost some contracts, sold a facility in Texas, and struggled with power outages at a North Dakota facility.
However, the cloud services segment only narrowed its loss from $41 million to $32 million -- while the data center hosting segment's profit of $57 million marked a significant improvement from its loss of $5 million a year earlier.
That's why it wasn't too surprising when Applied Digital recently announced it would sell its entire cloud services business and continue transitioning into a REIT. It hasn't found any buyers yet, but that divestment could pave the way toward generating profits and dividends.
Why could that change turn it into a great investment?
From fiscal 2024 to fiscal 2027 (which ends in May 2027), analysts expect Applied Digital's revenue to increase at a compound annual growth rate (CAGR) of 47%. They also expect it to turn profitable on a GAAP basis by the final year. However, those estimates assumed it would continue to expand its higher-growth cloud services segment.
Without that segment, it might grow at a rate comparable to Equinix, which is expected to grow its revenue and earnings at a CAGR of 7% and 28%, respectively, from 2024 to 2027. Equinix also became a REIT in 2015 and pays a forward dividend yield of 2.4%.
In other words, Applied Digital could evolve from a messy, cash-burning company into a stable REIT that will profit from the long-term growth of the cloud, AI, and data center markets. The latter would be more appealing than the former if tariffs, trade wars, and other macro headwinds rattle the broader markets. Therefore, investors who are looking for an under-the-radar AI stock that might pay big dividends soon should pay more attention to Applied Digital right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Bitcoin, Digital Realty Trust, Equinix, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
