Asymmetric Upside

Small Cap Pick: Applied Digital (APLD-US, $1.6B MCAP)

2024 will be the year that the bottleneck shifts from chips to power.

Those companies that are positioned with buildouts that have access to strong power sources will win this game over the near term.

There was a lot of hidden value in an under-the-radar area…crypto mining facilities.

These are massive facilities that include significant infrastructure investment including power-connect-ready facilities.

The reason I like these plays so much is the base value plus upside optionality. Crypto has its own tailwinds from a more friendly regulatory regime, while the burgeoning AI revolution provides additional upside.

That leads me to look at these opportunities as asymmetric risk-reward stocks…

My favorite.

This company also just secured a major strategic that could get alot more interesting.

Let’s dig in!

• Overview 👉 What Does Applied Digital Do?

• Asset Portfolio 👉 Operating + Pipeline

• How Do They Make Money? 👉 Cloud Data Center Hosting + HPCaaS

• Strategic Partnerships 👉 Piecing Together the Puzzle

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

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Overview 👉 What Does Applied Digital Do?

Applied Digital Corporation (APLD) is a technology company specializing in providing high-performance computing (HPC) solutions to power-intensive applications. The company initially focused on blockchain and cryptocurrency mining infrastructure, offering colocation services to crypto miners by building and managing state-of-the-art data centers. However, recognizing the broader opportunities in HPC, Applied Digital has expanded its scope to address the growing demand for data processing in artificial intelligence (AI), machine learning (ML), and other data-intensive workloads.

At the heart of Applied Digital's operations are its strategically located data centers, designed for optimal energy efficiency and scalability. These facilities are built in regions with access to low-cost, sustainable energy sources, enabling the company to maintain competitive pricing for clients while minimizing environmental impact. Applied Digital partners with businesses in diverse industries, providing the computational horsepower required for tasks ranging from AI model training to complex simulations and big data analytics.

In addition to its infrastructure services, Applied Digital has positioned itself as a key enabler of digital transformation, bridging the gap between traditional computing needs and the evolving demands of modern enterprises. By leveraging its expertise in managing large-scale data centers, the company offers tailored solutions to help clients scale their operations effectively. Applied Digital’s evolution reflects the dynamic nature of the tech industry, as it continues to adapt its offerings to align with emerging trends and technological advancements.

Asset Portfolio 👉 Operating + Pipeline

Applied Digital has a broad portfolio of assets in both the crypto and AI workload space:

Data Centers: Applied Digital operates a network of high-performance data centers focused on providing scalable and efficient infrastructure for compute-intensive workloads.

• Ellendale HPC Campus: Located in North Dakota, this campus is undergoing a 400-megawatt build-out to support advanced AI workloads.

• Jamestown, North Dakota Facility: A 106-megawatt data center operating at full capacity, providing energized space to crypto-mining customers.

• Ellendale, North Dakota Facility: A 180-megawatt data center also operating at full capacity, serving similar purposes.

Cloud Services: The cloud business complements its physical data centers, providing customers with flexible, on-demand access to processing power while positioning the company to capture growing demand in AI-driven industries. Applied Digital offers cloud services under its Sai Computing brand, providing high-performance computing power for AI and machine learning applications. As of August 31, 2024, the company had six clusters online, each containing 1,024 GPUs.

How Do They Make Money? 👉 Cloud Data Center Hosting + HPCaaS

Applied Digital generates revenue by offering these digital infrastructure solutions tailored to high-performance computing (HPC) applications, including cryptocurrency mining, artificial intelligence (AI), and machine learning workloads.

The company’s business model revolves around leveraging its state-of-the-art data centers and cloud services to provide scalable and cost-effective computing power to a diverse client base. Key revenue streams include

Data Center Hosting Services: Applied Digital operates energy-efficient, high-capacity data centers strategically located in low-cost energy regions like North Dakota. These centers provide infrastructure for customers in industries with high computational demands. The company earns revenue by leasing space, energy, and computing power to clients, primarily cryptocurrency miners and enterprises requiring significant processing capabilities.

High-Performance Computing as a Service (HPCaaS): Under its Sai Computing brand, Applied Digital offers cloud-based HPC services optimized for AI, machine learning, and other advanced applications. Customers pay for on-demand access to GPU-powered clusters, enabling them to scale workloads without investing in their own infrastructure.

Anchor Tenants and Long-Term Contracts: The company secures long-term agreements with anchor tenants, ensuring a stable revenue base. These tenants often require dedicated capacity for large-scale workloads, providing Applied Digital with predictable cash flows.

Energy Optimization and Cost Management: By operating in regions with abundant renewable energy and low power costs, Applied Digital minimizes operational expenses and maximizes profit margins. Some revenue may also come from energy arbitrage opportunities, depending on market conditions.

Strategic Partnerships 👉 Piecing Together the Puzzle

There was a MASSIVE recent development.

In January 2025, Applied Digital entered into a $5 billion perpetual preferred equity financing facility with Macquarie Asset Management to support its HPC business. This includes an initial investment of up to $900 million for the Ellendale HPC Campus and the option to invest an additional $4.1 billion in future HPC projects.

Additionally, last week they announced that they signed a conditional agreement to provide datacenter capacity at its Ellendale, North Dakota campus, subject to finalization of definitive lease documents. The conditional agreement is for a total of 100MWs for a term of 10 years and is conditional on securing financing for the completion of construction. The total contract value (TCV) is approximately $2.2 billion over the 10-year term.

Boom! financing in place and a potential offtaker in late stage discussions for utilization. This is a massive validation of the business model. Now it’s time to hit targets for the buildout.

Additionally, In September 2024, the company secured a $160 million private placement financing from investors including NVIDIA and Related Companies, underscoring its position in the accelerated compute space.

Right before this financing round, in August, Applied Digital achieved "Elite Partner" status in the NVIDIA Partner Network (NPN) as of August 22, 2023. This designation recognizes Applied Digital as a vetted and trusted high-performance computing (HPC) partner, enabling close collaboration with NVIDIA to integrate cutting-edge GPUs and networking technologies into their data centers.

This sound familiar? This is very similar to the Core Weave model. Core Weave has preferential access to Nvidia GPUs and also has recieved financing from Nvidia as well. They are expected to file their S-1 to go public soon. They raised $650 in a secondary at a $23B valuation.

These strategic investments position Applied Digital to capitalize on the growing demand for digital infrastructure supporting AI and HPC applications.

By The Numbers 👉 Key Metrics

The Bitcoin hosting business has been in operation for quite a while and has the following revenue ramp:

For me this is the baseline. The real excitement comes from the AI HPC build out that is currently underway.

When it comes to the Ellendale campus, one customer has already taken down 100MW of the capacity with 300MW to go. Breaking out the illustrative economics of potential deals gets us the following unit economics:

Turning to Bloomberg forecasts, we can more visibly see how this revenue buildout is expected to materialize:

Because this is a very capital-intensive business, although the company is EBITDA positive, we need to look for net income inflection. This is due to the high capital expenditures required for this phase of buildout and the depreciation of the equipment necessary to scale growth.

That is why it was so important to sign that massive financing deal with Macquarie, to fund this company through the negative cash-burning J-curve portion of the profitability curve.

Risks 👉 Potential Pitfalls

Construction Risks: Applied Digital is currently building an extremely sophisticated data center, and it is doing this with a limited track history. Thus, there is the risk that Applied Digital runs into issues or underestimates costs.

AI/HPC Competition: There are now many Bitcoin miners entering the AI/HPC market. APLD’s campus will not be the only game in town, and this could result in potential demand issues should customers opt to go with other data center providers.

Missing Target Economics: Applied Digital could generate around $1m of NOI per MW. Should actual lease terms be materially lower than this, shares could react unfavorably to the customer announcement.

AI Boom Fizzles: Should AI use-cases and AI adoption not materially inflect higher, demand for GPUs and thus demand for next-gen data centers will not be as great, which would negatively impact demand and economics of Applied Digital’s assets.

Wrapping Up…

Right now there is a massive bottleneck for these types of assets.

As AI proliferates and starts to shift to the application layer, usage will drastically spike. Right now, a lot of the focus is training these large language models. A scare in the market was that training gains were slowing down. However, as the usage for compute shifts from training to inferencing due to reasoning models, there will be another leg up in demand.

The current Bitcoin mining business is a solid underpinning, but for me the exciting opportunity is the AI high performance compute facilities, and this business is now starting to ramp quite nicely.

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Cheers,

The GRIT Alpha Team

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