Key Points
Artificial intelligence data centers could see $7 trillion in investment by 2030, according to a new McKinsey report.
Applied Digital's debt has exploded as it attempts to capitalize on the enormous opportunity.
The data center builder is heavily reliant on a single customer.
- 10 stocks we like better than Applied Digital ›
The artificial intelligence (AI) infrastructure boom is in full swing. McKinsey projects data center investments will hit $7 trillion by 2030. Applied Digital (NASDAQ: APLD) is positioned to capitalize on this incredible spend, but after digging into its financials, I'm staying away for a few key reasons.
Applied Digital's debt keeps growing
Applied Digital's debt skyrocketed from $44 million in the first quarter of 2024 to $2.6 billion today. The company's debt-to-equity ratio now exceeds 125% and is likely to continue to rise. Yes, the company is using debt to fuel growth, but Applied Digital is playing a dangerous game, considering the lion's share of future revenue depends on a single company.
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Customer concentration is a huge risk
The $16 billion in future lease revenue the company is banking on comes from just two companies -- and $11 billion of that is from CoreWeave, another high-growth company taking on extreme debt loads to scale rapidly.
If CoreWeave can't make good on its obligations, it could be catastrophic for Applied Digital.
Applied has to deliver on time or risk losing it all
If Applied Digital doesn't hit its construction timeline targets, it won't matter what position CoreWeave is in. That's because it has the right to walk away -- penalty-free -- from any of its leases if Applied Digital falls too far behind schedule.
Image source: Getty Images.
Delays are common in any construction project, but we're talking about incredibly complex and massive data centers here. That doesn't inspire confidence in me.
If everything goes perfectly, there's significant upside. But with the amount and nature of the debt Applied Digital has had to accrue to play ball, the risk for investors here is too high for my taste.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
