Applied Digital's Cloud Services Business Divestment Looks Promising

Core Insights - Applied Digital (APLD) plans to divest its cloud services division, which constitutes about one-third of its FY2025 revenues, to focus on becoming a pure-play data center REIT [1][8] - The divestiture aims to resolve customer conflicts with hyperscale clients and enhance market positioning for its primary leasing business [1][4] Financial Performance - APLD's cloud revenues dropped by 32-36% quarterly, leading to a revenue miss of $52.9 million compared to the estimated $64 million, which negatively impacted stock performance [2][8] - Despite cloud challenges, APLD secured significant deals, including a $7 billion, 15-year lease with CoreWeave and a nearly $5 billion investment from Macquarie, indicating strong demand for its HPC infrastructure [3][4] Strategic Moves - The sale of the cloud unit is seen as a corrective measure to streamline operations for a REIT transition and to stabilize balance sheets while unlocking long-term shareholder value [4] - APLD's stock has increased by 46.3% year-to-date, contrasting with a 6.8% decline in the industry [7] Valuation Metrics - APLD trades at a forward price-to-earnings ratio of 10.44, which is above the industry average and its five-year median of 1.43, indicating a potentially overvalued position [9] - The Zacks Consensus Estimate for APLD's fiscal 2026 earnings suggests a significant year-over-year increase of 73.6% [10]