Executive Summary / Key Takeaways

• Applied Digital is strategically pivoting from its legacy crypto-focused data center hosting towards becoming a significant player in the high-performance computing (HPC) and AI infrastructure market, leveraging its power-first site selection strategy and purpose-built data center designs.
• The company's Q3 FY25 results reflected a sequential decline in Cloud Services revenue due to a temporary transition to an on-demand model and technical issues, alongside expected seasonal power cost fluctuations in Data Center Hosting, impacting profitability metrics like Adjusted EBITDA.
• Significant financial and operational milestones have been achieved, including securing substantial financing arrangements with Macquarie Asset Management ($5B potential) and SMBC ($375M), which validate the business model, lower the cost of capital, and provide a clear funding path for the ambitious multi-gigawatt HPC pipeline.
• Construction of the Ellendale HPC campus is progressing on schedule, with the first 100 MW building expected to be ready for service and revenue generation in calendar Q4 2025, followed by subsequent buildings in 2026 and 2027, underpinned by secured power and supply chain.
• While the potential sale of the Cloud Services business introduces near-term uncertainty, it is a strategic move aimed at removing perceived competitive friction with potential data center leasing customers and aligning the company for a potential future REIT structure, potentially unlocking significant working capital.

Setting the Stage: Applied Digital's Evolution and Strategic Pivot

Applied Digital Corporation is undergoing a profound transformation, shifting its core identity from a data center operator primarily serving cryptocurrency clients to a designer, builder, and operator of next-generation digital infrastructure specifically tailored for the burgeoning High-Performance Computing (HPC) and Artificial Intelligence (AI) markets. This evolution is not merely a business pivot; it's a strategic response to the escalating global demand for high-density compute and the critical infrastructure required to power it.

The company's journey, while including earlier ventures, gained significant momentum around fiscal year 2023 with the establishment of its Data Center Hosting business. This segment, currently operating 286 megawatts (MW) across two fully contracted North Dakota facilities in Jamestown (106 MW) and Ellendale (180 MW), provided a foundational operational capability and revenue stream. However, recognizing the immense, unmet need for specialized infrastructure capable of handling advanced AI workloads, Applied Digital embarked on a more ambitious path: the development of purpose-built HPC data centers.

This strategic pivot is fundamentally driven by a "power-first" approach to site selection. Unlike traditional data center developers who might prioritize proximity to fiber hubs and then seek power, Applied Digital identifies locations with significant, available, and reliable power capacity first, and then ensures the necessary fiber connectivity is in place. This inverse strategy is a direct response to the current market bottleneck where obtaining large blocks of power in desirable locations can involve queues stretching five to ten years or more. By securing power availability upfront, Applied Digital believes it gains a critical advantage in delivering capacity on timelines that hyperscalers and large enterprises urgently require.

The company's strategic vision is to become a leading platform capable of building and operating multiple large-scale HPC data centers. The Ellendale HPC campus in North Dakota, designed for an initial 400 MW of critical IT load, serves as the cornerstone of this strategy, intended to validate Applied Digital's capabilities as a full-stack developer and operator in this demanding market segment.

The Technological Edge: Purpose-Built Infrastructure for the AI Era

Applied Digital's competitive positioning in the HPC market is significantly underpinned by its focus on developing technologically differentiated infrastructure. The Ellendale HPC Facility, a 369,000 square-foot building, is being purpose-built to support the unique and demanding requirements of high-density AI and HPC applications.

The core technological differentiator lies in its design optimized for advanced cooling, specifically liquid-cooled infrastructure. This is crucial for handling the extreme power density of modern AI servers packed with powerful GPUs, which generate significantly more heat than traditional computing hardware. While specific quantifiable metrics on cooling efficiency relative to competitors were not readily available, the strategic intent is clear: to offer a highly efficient environment that minimizes energy waste associated with cooling, thereby contributing to ultra-low operating costs for customers.

Beyond cooling, the design incorporates features critical for hyperscale and enterprise AI workloads, including extreme power density, robust security, high-speed interconnectivity, and stringent compliance and control requirements. The facility is being engineered to provide the necessary power redundancy and reliable fiber connectivity essential for mission-critical AI applications. Management's commentary highlights that their site selection process now includes refining knowledge around latency requirements to ensure facilities meet North American needs, even in more rural locations identified for power availability.

Applied Digital is also exploring R&D initiatives related to heat recirculation or capture from its data centers. While more challenging for air-cooled Bitcoin facilities, the move to liquid cooling at the HPC campus creates a more viable opportunity. The stated goal is to find use cases for this waste heat, particularly in agricultural opportunities in the areas where they operate, such as greenhouses or aquafarming. While specific target metrics or timelines for commercializing heat capture were not detailed, this initiative reflects a strategic focus on maximizing energy efficiency and sustainability, potentially offering a further competitive advantage and contributing to lower net operating costs in the future.

The "so what" for investors is that this technological focus aims to create a competitive moat. By designing infrastructure specifically for the demands of AI/HPC, Applied Digital seeks to offer performance, efficiency, and cost advantages that traditional data centers or less specialized providers cannot easily match. This differentiation is intended to command higher lease rates, attract investment-grade tenants like hyperscalers, and support the company's long-term growth strategy in a rapidly expanding, yet infrastructure-constrained, market.

Navigating the Competitive Currents: Positioning for Hyperscale Demand

The landscape for high-performance computing infrastructure is intensely competitive, primarily featuring established private data center companies that have served hyperscalers for years, alongside evolving players like Applied Digital and others pivoting from related sectors like cryptocurrency mining. Applied Digital positions itself within this environment by emphasizing its unique strengths and strategic approach.

Key direct competitors operating in similar or overlapping segments include specialized AI infrastructure providers like CoreWeave, large telecom and data center operators like Lumen Technologies (LUMN), and even indirectly, the dominant GPU provider Nvidia (NVDA), whose hardware is central to the workloads hosted. Other players emerging from the crypto mining space, such as Riot Platforms (RIOT) and Hut 8 (HUT), also represent competitive forces as they pursue AI data center opportunities.

Applied Digital's core competitive advantage, as articulated by management, stems from its power-first site selection strategy. In a market where power availability is the number one bottleneck, securing sites with significant, near-term power (available through the end of 2027) before traditional real estate considerations provides a distinct edge over competitors facing multi-year power queues. The second major bottleneck is the supply chain for critical electrical components like switchgear and transformers. Applied Digital highlights its experience and proactive procurement efforts, having secured places in line for key components for its Ellendale build, which helps mitigate potential delays that impact competitors.

When comparing Applied Digital to its rivals, the competitive analysis indicates varying strengths. CoreWeave, for instance, benefits from vertical integration and explosive growth driven by large backlogs, though it carries high debt. Lumen leverages its established telecom network for lower latency but may lag in pure AI infrastructure innovation. Nvidia dominates the chip market, setting the pace for hardware performance that infrastructure providers must support. Crypto miners pivoting to AI, like Riot and Hut 8, share a similar evolutionary path but may lag Applied Digital in AI-specific infrastructure efficiency and scalability.

Quantitatively, while precise, directly comparable market share figures for all niche competitors are not publicly detailed, Applied Digital is estimated to hold a smaller share (1-2%) in the AI/HPC data center market compared to more established players or specialized leaders like CoreWeave. However, its growth trajectory, reflected in its stock performance and pipeline development, suggests it is capturing market share in emerging segments. Financial performance comparisons show that Applied Digital's margins (TTM Gross Profit Margin: 5.58%, TTM Operating Profit Margin: -28.02%, TTM EBITDA Margin: -20.83%) currently lag behind more mature or vertically integrated players like Nvidia (FY25 Gross Margin: 75%, Operating Margin: 62%) or even Lumen (FY24 Gross Margin: 49%, Operating Margin: 4%), although Lumen also faces profitability challenges (FY24 Net Margin: -0.42%). Applied Digital's higher debt-to-equity ratio (TTM: 2.00) compared to some peers like Nvidia (FY25: 0.13) or Riot (FY24: 0.20) reflects its capital-intensive build-out phase.

Applied Digital strategically positions itself as a provider of purpose-built, sustainable, and scalable infrastructure, aiming to differentiate on efficiency and speed to market for large-scale deployments. The recent strategic partnerships with Macquarie Asset Management and SMBC are critical to this positioning, lending financial credibility and demonstrating the trust of leading financial institutions in Applied Digital's assets and pipeline. These partnerships are explicitly noted as instrumental in ongoing customer leasing discussions, increasing potential customers' comfort levels.

The potential sale of the Cloud Services business is also a strategic move influenced by competitive dynamics. Management noted that this segment is sometimes viewed as a competitor by potential data center leasing customers, creating a point of friction. Divesting this business could streamline Applied Digital's focus on the data center leasing model and remove this perceived conflict, potentially enhancing its appeal to hyperscale tenants.

In essence, Applied Digital is competing by focusing on the fundamental constraints of the AI infrastructure market – power and supply chain – and building specialized, efficient facilities. While facing competition from established players and more specialized firms, its strategy aims to carve out a significant position by delivering large-scale capacity where and when the market needs it most.

Recent Financial Performance and Operational Highlights

Applied Digital's financial results for the fiscal third quarter ended February 28, 2025, reflect a company in a significant transition phase, marked by both growth in strategic areas and the impact of operational challenges and strategic shifts.

Total revenue for Q3 FY25 was $52.92 million, an increase from $43.35 million in the prior year period. This growth was primarily driven by the Cloud Services Business, which contributed $17.75 million in revenue, a substantial increase from $5.55 million in Q3 FY24, reflecting the deployment of additional GPU clusters. However, Cloud Services revenue saw a sequential decline from the previous quarter (Q2 FY25 revenue was $27.7 million). Management attributed this sequential dip to a temporary transition of some capacity from reserve contracts to an on-demand model and technical hurdles encountered during the shift from a single-tenant to a multi-tenant environment. These technical issues were resolved in March 2025, and management expects the on-demand capacity to ramp up, projecting the Cloud business to operate at a run rate in the neighborhood of $110 million to $120 million annually once fully operational in this model.

The Data Center Hosting Business generated $35.17 million in revenue in Q3 FY25, a decrease from $37.80 million in Q3 FY24. This segment continued to operate its 286 MW capacity at full utilization across its Jamestown and Ellendale facilities. The decrease in revenue year-over-year was influenced by factors including the sale of the Garden City facility (which contributed revenue in the prior year period) and changes in related party contracts. Segment profitability for Data Center Hosting saw a significant improvement, moving from a loss of $24.44 million in Q3 FY24 to a profit of $8.78 million in Q3 FY25. This dramatic swing was largely due to the absence of the $21.70 million loss on classification of held for sale related to the Garden City facility recorded in the prior year period.

Overall Cost of Revenues increased to $49.14 million in Q3 FY25 from $47.06 million in Q3 FY24, primarily due to the growth in the Cloud business, including increased lease and lease-related expenses and depreciation/amortization on deployed assets. This was partially offset by decreased energy costs following the Garden City sale. Selling, General and Administrative (SG&A) expenses decreased to $22.72 million in Q3 FY25 from $30.02 million in Q3 FY24. This decrease was mainly due to depreciation and amortization related to GPU clusters shifting from SG&A to cost of revenues as the assets became revenue-generating, and lower professional service fees, partially offset by higher stock-based compensation.

The company reported a Net Loss of $35.55 million for Q3 FY25, compared to a net loss of $62.84 million in Q3 FY24. The Q3 FY25 loss included significant non-operating expenses such as $8.90 million in interest expense (up from $4.77 million in Q3 FY24 due to increased debt and finance leases), a $1.18 million loss on extinguishment of debt (related to the Macquarie Promissory Note repayment), and a $6.42 million loss on change in fair value of warrants (related to STB Warrants). The prior year period included a $2.61 million loss on change in fair value of related party debt.

Adjusted EBITDA, a non-GAAP measure often used in the data center industry, increased significantly to $10.02 million in Q3 FY25 compared to $1.29 million in Q3 FY24. However, this was a sequential decrease from Q2 FY25, impacted by the temporary Cloud revenue dip and expected seasonal fluctuations in power costs in the Data Center Hosting segment.

Liquidity remains a critical focus. As of February 28, 2025, the company had $68.74 million in unrestricted cash and cash equivalents and $154.14 million in funds restricted for construction. The balance sheet showed a working capital deficit of $119.30 million, which management acknowledged raised substantial doubt about the company's ability to continue as a going concern. However, management believes this doubt is reasonably alleviated by factors including the ability and intent to sell additional preferred stock (approx. $12 million), the potential sale of the Cloud Services Business (expected to result in a net working capital surplus of $117.6 million), and the flexibility to adjust capital spending and vendor payment terms.

Operational highlights include the continued full operation of the Data Center Hosting facilities and the resolution of the Cloud Services technical issues in March 2025. Construction on the first 100 MW Ellendale HPC building remains on schedule, with nearly all equipment landed, mitigating tariff impacts on build costs.

Strategic Initiatives and Outlook

Applied Digital's outlook is heavily weighted towards the successful execution of its HPC strategy, underpinned by recent significant financial partnerships and the ongoing build-out of the Ellendale campus and future sites.

The most pivotal strategic initiative is the development and leasing of the Ellendale HPC campus. Construction of the first 100 MW building is on schedule and expected to be ready for service and begin generating revenue in calendar Q4 2025. Construction is also underway for the second 150 MW building, anticipated to be ready for service by the end of calendar Q2 2026 and generating revenue in calendar Q3 2026. Planning for the third 150 MW building is in progress, with readiness expected in calendar Q1 2027. Power and supply chain for all three buildings (totaling 400 MW) are secured. Management expects to provide an update on leasing discussions for the Ellendale campus in the near term, anticipating that one customer will likely lease the entire initial 400 MW campus.

Crucially, the company has secured transformative financing arrangements to support this build-out and future expansion. The partnership with Macquarie Asset Management provides potential access to up to $5 billion in perpetual preferred equity financing, including an initial allocation of up to $900 million for Ellendale and a right of first refusal for an additional $4.1 billion across future pipeline projects. This partnership, along with future project financing, is expected to allow Applied Digital to recover over an estimated $300 million of its equity investment in Ellendale. The $375 million financing arrangement with SMBC, a global leader in data center financing, further validates the company's assets and pipeline and provides capital for Ellendale development after prepaying prior debt. These deals are explicitly intended to lower the cost of capital and provide a clear funding roadmap for constructing over 2 gigawatts of HPC capacity.

Beyond Ellendale, Applied Digital is actively marketing a 1.4 gigawatt pipeline of additional campuses with power available in 2026 and 2027. Management reports substantial increases in inbound interest from multiple top-tier hyperscalers for this near-term capacity, which is in short supply. They are working towards securing an LOI for a second site, likely in the Dakotas, potentially by the end of calendar 2024.

The potential sale of the Cloud Services Business is another significant strategic initiative. Approved by the Board for negotiation in February 2025 and classified as held for sale in April 2025, this move represents a strategic shift. The rationale includes removing perceived competitive friction with potential data center leasing customers and positioning the company for a potential future transition to a data center REIT structure, which could lower the cost of capital. While the future of this segment is under review, operationally, management expects revenue to return to prior levels ($110M-$120M annual run rate) as the on-demand capacity ramps up following the resolution of technical issues.

Overall, the outlook is one of aggressive expansion in the HPC sector, fueled by strategic financing and a pipeline of power-secured sites. The successful finalization of the Ellendale lease is seen as a critical near-term catalyst that will validate the company's capabilities and accelerate the monetization of its broader pipeline.

Risks and Challenges

Despite the ambitious growth plans and strategic partnerships, Applied Digital faces significant risks and challenges that could impact its trajectory and investment thesis.

A primary concern highlighted in the financials is the working capital deficit ($119.30 million as of Feb 28, 2025), which raised substantial doubt about the company's ability to continue as a going concern. While management has outlined mitigation strategies (potential preferred stock sale, Cloud business sale, capital spending adjustments), successful execution of these plans is crucial to maintaining liquidity.

The regulatory environment is evolving rapidly, particularly concerning HPC, cloud, and blockchain hosting. Increased scrutiny and potential regulations related to energy consumption, environmental compliance, and the use of digital assets could materially impact the business. Changes in U.S. trade policy, including tariffs, could also make procuring necessary equipment more difficult and costly, potentially delaying construction and impacting profitability.

Execution risk is inherent in the company's rapid build-out strategy. The ability to timely and successfully complete construction of new facilities, including the Ellendale campus and future sites, within budget and with appropriate contractual margins and efficiencies, is paramount. Delays or denials of necessary permits (zoning, siting, utility) or other issues with public agencies and utility companies could disrupt timelines.

Customer concentration is a risk, particularly in the Data Center Hosting segment and potentially in the HPC segment if a large portion of capacity is leased to a single hyperscaler. The addition or loss of significant customers or material changes to relationships could have a substantial impact on revenue and profitability. The thorough and sometimes lengthy nature of hyperscaler contract negotiations has already resulted in delays in finalizing the Ellendale lease, demonstrating the challenges of securing major tenants. Being a first-time supplier to these large customers can extend negotiation timelines compared to established providers.

The potential sale of the Cloud Services Business introduces near-term uncertainty regarding the future of that segment and its contribution to the overall business. While intended to be strategic, the outcome and timing of this process are not guaranteed.

Furthermore, the company is subject to litigation risks, including a putative securities class action lawsuit and a derivative lawsuit. While management is unable to estimate the range of potential loss, an unfavorable outcome could have a material effect on results of operations.

Finally, the volatility of cryptoasset prices and uncertainties surrounding cryptoasset regulation policy remain risks for the Data Center Hosting segment, although the strategic focus is shifting towards the less volatile HPC market.

These risks underscore the importance of successful operational execution, prudent financial management, and effective navigation of external market and regulatory dynamics for Applied Digital to realize its growth potential.

Conclusion

Applied Digital stands at a critical juncture, actively transitioning from its origins in cryptocurrency hosting to capitalize on the explosive demand for High-Performance Computing and AI infrastructure. While recent financial results, particularly in Q3 FY25, highlighted the complexities of this pivot and the impact of temporary operational challenges, the underlying narrative remains focused on the significant opportunity in the large-scale data center market.

The company's strategic emphasis on securing power availability first, coupled with its development of purpose-built, technologically differentiated infrastructure designed for the demands of AI workloads, positions it to address a critical bottleneck in the industry. The successful securing of substantial financing facilities from leading institutions like Macquarie and SMBC serves as a powerful validation of this strategy and provides the necessary capital runway to execute on its ambitious multi-gigawatt pipeline.

The ongoing construction of the Ellendale HPC campus, with specific timelines for bringing significant capacity online through 2027, represents the tangible execution of this strategy. While the finalization of the initial hyperscaler lease has taken time, management expresses high confidence in its near-term completion, which is expected to be a key catalyst, validating Applied Digital's capabilities as a full-stack provider and accelerating the monetization of its broader pipeline. The potential divestiture of the Cloud Services business, while creating near-term uncertainty, aligns with the long-term vision of focusing on the data center leasing model and potentially transitioning to a REIT structure.

For investors, the story of Applied Digital is one of high growth potential in a secularly expanding market, driven by a differentiated strategy and enabled by strategic financing. However, this potential is accompanied by execution risks related to construction, customer acquisition, and managing liquidity amidst significant capital expenditures. The successful conversion of the power pipeline into contracted, revenue-generating capacity, underpinned by its technological capabilities and strategic partnerships, will be the ultimate determinant of whether Applied Digital can establish itself as a leading player in the competitive HPC infrastructure landscape.