Key Points
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Some investors lost faith in Applied Digital’s stock after Nvidia sold its entire stake in the company.
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Applied Digital’s shares also likely fell as investors have grown wary of some AI stocks.
Shares of Applied Digital Corporation (NASDAQ: APLD), a data center infrastructure company, fell 19.5% in February, according to data provided by S&P Global Market Intelligence, as investors continued to pare back holdings of some riskier tech stocks.
Shareholders were also unhappy to learn last month that Nvidia had sold its stake in Applied Digital, fueling further pessimism and prompting some to question the stock’s sky-high valuation.
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Risky AI stocks have lost some steam
Investors have had a lower tolerance for risky artificial intelligence stocks lately, and that was clear for Applied Digital last month.
The company builds data centers that its customers then lease to boost their AI compute power. And while AI data center investments are booming, Applied Digital has yet to turn a profit from the business. What’s worse is that the company’s stock is very expensive right now, with Applied Digital’s shares trading at a price-to-sales (P/S) ratio of 26 compared to the average P/S ratio of about 8 for the tech sector.
The rising skepticism of buying and holding AI stocks at any cost likely fueled Applied Digital’s sell-off at the beginning of the month — and then came the news that Nvidia has sold all of its 7.7 million shares of Applied Digital.
Given that Nvidia is one of the most important AI companies in the world, the decision to sell Applied Digital’s stock sent a signal to investors that the stock may not be worth holding. Applied’s shares fell quickly in the remainder of the month.
Where Applied Digital goes from here
I’ve been skeptical of Applied Digital’s long-term trajectory, given that, despite sales rising 250% in the most recent quarter, the company is still unprofitable and has a massive debt load of $2.6 billion. Even if profits come eventually, its business is highly capital-intensive.
What’s also problematic is that the company has a high concentration of its business with just one customer, CoreWeave. CoreWeave signed an $11 billion data center lease deal over 15 years with Applied Digital, and while that sounds good at first blush, it means Applied’s fate is closely tied to CoreWeave’s success. If production on the project slows or CoreWeave can’t complete the arrangement as it currently stands, then Applied’s financial picture looks more uncertain.
Investors will get more insight into Applied Digital’s business next month when the company reports its third-quarter results. But with the company’s high customer concentration, significant debt, and expensive data center spending costs, Applied Digital looks too risky to own right now.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.