Applied Digital: A $1.5 Billion NOI Dream at Risk of Shareholder Dilution

The rise of artificial intelligence has ignited a frenzy in infrastructure investment, with Applied Digital Corporation (APLD) at the forefront of this transformation. The company's ambitious pivot to AI and high-performance computing (HPC) data centers has positioned it as a key player in a sector poised for explosive growth. Yet, beneath the surface of its strategic vision lies a critical question: Are lenders now set to benefit more than shareholders in this capital-intensive buildout?

A Capital Structure Built on Debt and Preferred Equity

Applied Digital's recent financing maneuvers reveal a company prioritizing speed and scale over shareholder equity. In late 2025, it secured $2.35 billion in senior secured notes due 2030, priced at 97% of face value, with a hefty 9.25% interest rate. These notes are fully guaranteed by its subsidiaries and secured by first-priority liens on equity interests and project accounts. Such terms offer lenders robust protections, including asset collateralization and covenant structures that likely limit operational flexibility but ensure repayment priority in distress scenarios.

Simultaneously, the company tapped a $5 billion preferred equity facility with Macquarie Asset Management, drawing $112.5 million in Q1 2026. This facility allows Applied Digital to scale its 4-gigawatt development pipeline without continuous equity raises, a move CEO Wes Cummins described as a strategy to "reduce dilution at the public company level." However, the preferred equity structure itself introduces risks. The April 2025 convertible preferred stock, for instance, carries a 4% original issue discount and conversion terms tied to a floor price of $4.25 per share-well below the stock's recent performance. If the share price remains depressed, this facility could dilute existing shareholders by up to 19.99% under NASDAQ rules.

Lenders vs. Shareholders: A Zero-Sum Game?

The tension between lender returns and shareholder value is stark. For lenders, the 9.25% yield on the 2030 notes represents a compelling risk-reward trade-off, particularly given the long-term leases with hyperscalers like CoreWeave, which provide a stable revenue stream. These leases, spanning multi-decade terms, act as a de facto guarantee of cash flow, insulating lenders from the volatility of the public markets.

Shareholders, by contrast, face a more precarious outlook. The company's Q1 2026 results underscored this imbalance: while it reported $64.2 million in revenue, a $27.8 million net loss and a mere $0.5 million in adjusted EBITDA highlighted the strain of its capital expenditures. The $70.46 million shelf registration for 2.4 million common shares and the proposed spinoff of its cloud business into ChronoScale Corporation further signal a strategy reliant on dilution to fund growth. Analysts project Q3 2026 revenue of $90.5 million-a 42% year-over-year increase-but such optimism hinges on the assumption that margins will stabilize.

The Dilution Dilemma

The most pressing concern for shareholders is the compounding effect of dilution. Applied Digital's $150 million convertible preferred equity facility, with its 95% VWAP conversion discount and 4.99% ownership caps, creates a scenario where institutional investors could acquire significant stakes at depressed prices. If the stock remains below $4.25, the conversion feature effectively forces shareholders to subsidize lender returns. This dynamic is exacerbated by the company's $268.9 million equity raise in late 2025, which already diluted existing holders.

Moreover, the spinoff of its cloud business, while potentially unlocking value, introduces execution risk. The proposed reverse merger with EKSO Bionics requires regulatory and market approval, and any misstep could erode confidence in the core AI infrastructure business. For shareholders, this strategic complexity adds another layer of uncertainty to an already volatile capital structure.

A Sustainable Path Forward?

Applied Digital's strategy hinges on converting signed leases into operational campuses on time and on budget. Success would generate a $1.5 billion net operating income (NOI) stream, as projected by analysts, but this outcome depends on flawless execution. The company's heavy reliance on debt and preferred equity, while prudent in securing low-cost capital, shifts risk to shareholders. Lenders, with their secured claims and high-yield returns, are now better positioned to benefit from the AI boom than equity holders.

For investors, the key question is whether the potential rewards of Applied Digital's expansion justify the dilution risks. The answer lies in the company's ability to deliver on its operational promises and maintain disciplined capital allocation. Until then, the balance sheet remains a minefield for shareholders, with lenders poised to reap the lion's share of the rewards.