Applied Digital Corporation: A Rare Entry Point in the AI Infrastructure Boom

The race to dominate AI infrastructure is intensifying, and Applied Digital Corporation (APLD) stands at a critical inflection point. After years of navigating a complex business model, the company has decisively pivoted to focus on high-performance computing (HPC) data centers—a move that positions it to capitalize on soaring demand for AI workloads. Recent developments, including its $7 billion lease with hyperscaler CoreWeave and a landmark $5 billion funding partnership with Macquarie Asset Management, suggest this transition is not only viable but transformative. For investors, the stock's recent pullback creates a compelling entry point to bet on its 400 MW Ellendale project and REIT conversion potential. Here's why the risk-reward equation now favors longs.

The Strategic Pivot: From Cloud Services to AI Infrastructure

APLD's most consequential move in 2025 was divesting its Cloud Services segment, which contributed roughly one-third of its FY2025 revenue. While this decision caused a near-term revenue dip (Q3 revenue missed estimates by $11 million), it eliminated a key conflict of interest: Cloud Services competed with hyperscale clients like CoreWeave, who now lease the bulk of Ellendale's capacity. By shedding this division, APLD can now focus solely on owning and operating AI-optimized data centers—a far more capital-efficient and scalable business model.

The company's Ellendale campus in North Dakota is the crown jewel of this pivot. Designed to scale up to 1 gigawatt, the facility combines low-cost energy (thanks to North Dakota's abundant hydropower and wind resources), energy-efficient design, and rapid deployment capabilities. Its first phase—a 250 MW lease with CoreWeave—will generate $7 billion in revenue over 15 years, with an option to expand by 300 MW. This deal alone underscores the demand for purpose-built AI infrastructure, which requires dense power density and cooling systems that legacy data centers often lack.

Debt-Free Growth via Macquarie's $5 Billion Backstop

APLD's partnership with Macquarie Asset Management is a game-changer. The $5 billion perpetual preferred equity facility—$900 million for Ellendale's initial expansion and $4.1 billion for future projects—provides a debt-free funding mechanism. The terms are favorable: 12.75% annual dividends, rising gradually, and a 1.8x liquidation preference that prioritizes equity holders. Crucially, Macquarie's stake is capped at 15% of the HPC subsidiary, ensuring APLD retains 85% ownership. This structure shields the company from the balance sheet strain of traditional debt, while aligning Macquarie's incentives with APLD's growth.

The funding also addresses near-term liquidity needs. APLD used a portion to repay $150 million in existing debt and secure a $450 million convertible notes offering, which will bolster its $314.6 million cash pile. With net debt reduced to ~$428 million post-transaction, the company's leverage ratio improves, easing investor concerns about its $8.9 million quarterly interest expense.

The REIT Conversion: Unlocking a Higher Valuation Multiple

Divesting Cloud Services was not just about simplifying operations—it was a critical step toward REIT conversion. REITs, which pay no corporate tax in exchange for distributing 90% of earnings to shareholders, typically trade at higher price-to-sales (P/S) ratios than traditional real estate companies. APLD's current P/S of ~11.4x is elevated by its non-GAAP adjustments, but as it transitions to a REIT, this multiple could expand to 15–20x, similar to peers like CyrusOne (Convergint) or Digital Realty.

Analysts at JMP Securities and Craig-Hallum highlight this potential, with a consensus $14 price target implying 25% upside. A successful REIT conversion could also attract yield-seeking investors, reducing volatility and providing a stable dividend stream. Management has signaled that the path is now clear, with the Cloud Services sale expected to finalize in late 2025.

Why the Dip is a Buying Opportunity

APLD's stock has lagged despite these positives, trading at $11.18—a 30% drop from its June 2025 peak. This pullback reflects short-term pain: a Q3 net loss of $138.7 million (driven by non-cash charges) and lingering concerns about execution risks. However, adjusted metrics tell a different story: revenue grew 51% YoY to $63.9 million, and adjusted EBITDA surged 93% to $21.4 million.

The risks are real. Hyperscaler lease delays or power shortages (Morgan Stanley warns of a 36 GW shortfall by 2028) could disrupt growth. Yet APLD's Ellendale project is already ahead of the curve, with its first CoreWeave data center set to open in Q4. Meanwhile, its $7 billion long-term lease provides a stable revenue floor, and Macquarie's funding removes financing uncertainty.

Investment Thesis: Buy the Dip, Target $14+ by 2026

APLD is a buy here. The stock's current valuation does not reflect its transformation into a high-margin HPC landlord or its REIT upside. Key catalysts include:
- Finalizing the CoreWeave leases and securing additional hyperscaler agreements.
- Progress on the Ellendale expansion to 400 MW by mid-2026.
- Completion of the Cloud Services sale, enabling a smoother REIT path.

With a median analyst target of $14 and upside to $18, the risk-reward favors longs. Even in a base-case scenario ($6–9/share), the downside is limited by its improving balance sheet and contractual cash flows.

Conclusion

Applied Digital is no longer a speculative play—it's a strategic bet on the AI infrastructure boom. Its Ellendale project and Macquarie-backed growth model are hard to replicate, and the REIT conversion adds a leveraged tailwind. At current levels, investors can buy a $7 billion HPC asset with 15-year leases at a steep discount to peers. For those willing to look past near-term noise, APLD offers one of the most compelling risk-reward profiles in the data center sector.

Rating: Buy
Price Target: $14–$18 by early 2026
Key Risk: Hyperscaler lease delays or regulatory hurdles.

Disclosure: This analysis is for informational purposes only and does not constitute investment advice. Always conduct your own research.