Meet the Underrated Artificial Intelligence (AI) Stock That Could Soar 255% in a Year, According to Wall Street
Key Points
Shares of Applied Digital have pulled back over the past three months, opening a buying opportunity for savvy investors.
The data center specialist's solid lease revenue pipeline and its ability to achieve strong operating margins should set it up for a solid long-term financial performance.
Applied Digital trades at an extremely attractive valuation, which explains why analysts are anticipating a massive jump in the stock over the coming year.
Artificial intelligence (AI) infrastructure stocks have been under pressure lately, as investors are worried about high financing costs and the ballooning debt that many infrastructure companies are taking on to fund the build-out of data centers.
This explains why fast-growing companies like Applied Digital (NASDAQ:APLD) have dropped significantly in recent months. The company, which designs, builds, and operates data centers meant for handling AI workloads and high-performance computing (HPC) applications, has lost 27% of its value in three months.
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Wall Street, however, seems confident about Applied Digital's prospects over the coming year. Let's see why that is the case, and check if this AI stock can live up to expectations.
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Applied Digital is a major beneficiary of the AI infrastructure boom
AI data center demand is increasing at a terrific pace. Semiconductor research and advisory provider SemiAnalysis predicts that 25 gigawatts (GW) of net data center capacity will be added in 2026, significantly higher than last year's 15.6 GW. Even better, data center capacity additions are likely to accelerate in 2027 to 51.2 GW.
Applied Digital builds and leases out AI factories and data centers, which explains why it is growing at an incredible pace. The company's revenue in the first quarter of fiscal 2027 (which ended Aug. 31) jumped 322% year over year to $342 million. This impressive acceleration is attributable to the delivery of 75 megawatts (MW) of data center capacity on July 1.
Notably, Applied Digital delivered another 75 MW of capacity after the quarter ended. It now has a total of 250 MW of active capacity at its Polaris Forge 1 data center complex. Looking ahead, management expects to bring 600 MW of data center capacity online over the next 12 months. This points to a significant increase in Applied Digital's top line, as it will see a significant ramp-up in lease revenue.
Even better, Applied Digital expects to operate 3.5 gigawatts (GW) to 4 GW of total data center capacity by the end of 2030. This significant expansion over the next four years will supercharge Applied Digital's growth. It is worth noting that the company already has $36 billion in contracted lease revenue across its five data center campuses. These lease contracts have a base term of 15 years.
Importantly, Applied Digital management pointed out earlier this year that its contracted lease revenue pipeline could hit $86 billion if customers exercise all renewal options. This revenue pipeline is based on contracts for 1.41 GW of capacity already in place. So, the potential expansion of Applied Digital's capacity by 2030 could pave the way for further growth in its revenue pipeline.
Not surprisingly, analysts anticipate Applied Digital's top line to jump by more than 3x in just two fiscal years.
APLD Revenue Estimates for Current Fiscal Year data by YCharts
But what about the debt?
Applied Digital reported $6.4 billion in debt in fiscal Q1. That was way higher than the year-ago period's debt of $687 million. Not surprisingly, Applied Digital's interest expense surged by 866% year over year to $77.4 million.
However, investors should note that more than 80% of Applied Digital's debt will mature in fiscal 2031 or later. We have already seen that the company's revenue growth is poised to accelerate through fiscal 2029, and the trend will continue beyond that as it adds capacity. So, Applied Digital should be able to service its debt over the long run.
Moreover, Applied Digital points out that the majority of its capacity will be online in 2028, reaching 1.51 GW after a couple of years. What's more, Applied Digital estimates that the net operating income margin at its existing five data center campuses will be north of 80%. As a result, the company should be able to generate sufficient profits from 2029 onward to cover interest expenses and repay the debt.
So, it is easy to see why analysts remain bullish about this AI infrastructure stock's prospects over the coming year. Applied Digital has a 12-month median price target of $69, implying a 255% jump from current levels. Also, 18 of the 20 analysts covering the stock rate it as a buy. The recent slide in Applied Digital stock has brought its price-to-sales ratio to just 6.5.
That's quite cheap for a company that's multiplying its revenue at an impressive rate and has the potential to sustain its momentum over the long run. If Applied Digital's revenue jumps to $3.03 billion in fiscal 2029 and it continues to trade at 6.5 times sales, its market cap will reach $19.7 billion. That's more than triple its current market cap.
Wall Street's price target is even more ambitious. However, the discussion above suggests that this growth stock could become a multibagger over the next three years, so investors should consider using its pullback as a buying opportunity.
Harsh Chauhan 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.