Should You Hold APLD at 16.8x P/E? 3 Reasons Despite the Premium

Core Insights - Applied Digital (APLD) shares are currently overvalued, indicated by a Value Score of F, with a forward 12-month Price/Sales (P/S) ratio of 16.76X compared to the industry average of 3.06X [1][2] - The premium valuation reflects investor sentiment regarding APLD's positioning in the AI infrastructure segment, as the company transitions from cryptocurrency hosting to developing AI-focused data centers [2][4] - APLD's year-to-date performance shows a significant appreciation of 209.5%, contrasting with a 6.4% decline in the sub-industry, indicating that much of the long-term AI infrastructure narrative is already priced in [4][12] Valuation and Revenue Visibility - APLD's valuation is significantly higher than peers like RIOT Platforms and Equinix, which trade at P/S ratios of 7.04X and 7.77X, respectively [1][7] - The company has approximately $11 billion in contracted lease revenue with CoreWeave, providing a multi-year revenue outlook as the first 100-megawatt building nears readiness [8][10] - For the fiscal second quarter, revenue estimates are projected at $75.95 million, reflecting an 18.91% year-over-year increase, as capacity comes online [8][10] Capital Structure and Growth Potential - APLD's capital structure supports development plans while minimizing reliance on equity issuance, having drawn $112.5 million from a $5 billion preferred equity facility [9][10] - The company expects to access $20-$25 billion in capital capacity for large-scale developments, aligning with the rising demand for AI-focused infrastructure [10][11] - APLD is advancing 700 megawatts of construction and has a 4-gigawatt development pipeline, indicating robust growth potential in response to market demand [11][12] Conclusion - APLD is well-positioned to capitalize on the growing demand for AI infrastructure, supported by long-term contracts and a substantial development pipeline [12] - However, the near-term outlook remains uncertain with elevated loss estimates, and the stock's significant appreciation may pose risks for new investors [12]