Is Applied Digital’s 35% stock plunge an AI buying opportunity?

Applied Digital Co. NASDAQ: APLD shares experienced a 4X surge in 2023, riding the artificial intelligence (AI) trend as a provider of next-generation AI data centers. Its data centers were specifically constructed to operate high-performance computing (HPC), signing two clients to its AI Cloud service with a total contract value upwards of $640 million.

The company is growing exponentially in the computer and technology sector but is a distant underdog competing with traditional data center giants like Equinix NASDAQ: EQIX and Digital Realty Trust NYSE: DLR.

The good

Applied Digital’s next-gen data centers are designed to support large-scale AI projects with powerful energy-efficient AI supercomputers delivered by Hewlett Packard Enterprises Co. NYSE: HPE. Plans are already in the works to build two more next-gen data centers outfitted with over 26,000 GPUs to support the growing demand for its AI Cloud Services.

Things were looking bright until the company reported its fiscal Q2 2024 earnings report and cut its guidance forecasts, causing shares to collapse over 35% in the following days. Is this an opportunity to get in cheap or a value trap?

The bad   

On Jan. 16, 2024, Applied Digital reported a fiscal Q2 2024 EPS loss of 5 cents, missing analyst estimates for a profit of 7 cents. The 12-cent EPS miss was followed by a revenue miss of $13.5 million, as they reported $42.2 million versus $55.7 million consensus analyst estimates. Net loss was $10.5 million and adjusted EBITDA was $10.6 million.

Adjusted net loss was $5.2 million. The company energized its 200 MW hosting facility in Garden City, TX. It began construction of a 100 MW high-performance computing (HPC) facility in Ellendale, North Dakota. Check out the sector heatmap on MarketBeat.

The Ugly

Applied Digital expects revenues and EBITDA to be below the low end of the previously guided range for the fiscal full year 2024. The company expects to end fiscal 2024 with a $500 million annual run rate (ARR) and an annualized adjusted EBITDA of $250 million. 

The silver lining

Investors can find some relief knowing that the shortfall was not demand-based but a supply issue. This is not a new issue, as it's been plagued with supply problems for the past four months. The cause of the EPS, revenue and guidance shortfall was due to the delay in networking components for the GPU clusters.

The GPUs had no delays, but they can't operate without the networking components. The networking components have been in short supply. This has caused the company to fall eight weeks behind schedule in deploying clusters.

Cluster buster

Clusters require every component to be delivered before they can be commissioned and operated. Each cluster is responsible for generating around $20 million in revenues annually. The company noted that deliveries had improved significantly in the previous weeks. Applied Digital still expects to have 10 clusters deployed by the end of 2024. This would bring its ARR to $500 million and adjusted EBITDA growth to 360% and 935%, respectively. Get AI-powered insights on MarketBeat.

 

Facility updates

Applied Digital CEO Wes Cummings stated that their 100 MW Jamestown facility continues operating at full capacity for the fifth straight quarter. Their 180 MW Ellendale facility is also operating at full capacity. Both North Dakota facilities generating a total of 280 MW are contracted out to clients on multi-year contracts. The company commenced initialization of its 200 MW Garden City, Texas facility, currently operating at 132 MW, with the rest of the capacity set to go online in the coming months.

Bitcoin is driving demand from miners for hosting services. Once the Garden City facility gets fully energized, the company will have 500 MW of hosting capacity over three facilities. The company added a new client, which brings its total annual contract value of cloud service contracts at full capacity to nearly $398 million. The company has 34,100 H100 GPUs from Nvidia Co. NASDAQ: NVDA on order.

CEO Insights

CEO Cummings commented, “To date, we have four 1,024 clusters installed and are planning to ship an additional four in the next two weeks. These clusters, as they are currently configured, put us in an elite class of next-generation supercomputers in terms of raw computing power or petaflops for the most demanding AI applications. We expect to reach a minimum of 10 before the end of the fiscal year, with the Jamestown cluster representing the opportunity to put us in the top 10 supercomputers for AI workloads. The fully commissioned clusters are expected to generate over $200 million of annualized revenue.”

Applied Digital analyst ratings and price targets are at MarketBeat. Applied Digital peers and competitor stocks can be found with the MarketBeat stock screener.

Daily rounding bottom and gap fill

The daily candlestick chart for APLD illustrates a rounding bottom that occurred after hitting a low of $3.52 on Nov. 13, 2023. The daily market structure low (MSL) triggered the $4.69 breakout. Shares staged a rally up to a high of $8.65 on Jan. 10, 2024, preceding its disastrous fiscal Q2 2024 earnings report. The initial reaction was a gap down to $6.34 and a further sell-off to $5.53 for a 26% haircut on Jan. 16, 2024. APLD continued to plunge another 10% to retest the $4.69 MSL trigger in the following days. The daily 50-period moving average resistance (MA) is at $5.88, as the gap down completely ruined the potential for a Golden Cross breakout through its 200-period MA. Gap-fill levels are at $4.35 and $3.44. The daily relative strength index (RSI) fell to the 34-band. Pullback support levels are at $4.69, $4.36, $3.80 and $3.44.