Key Points
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Applied Digital is raising capital against a long-term hyperscaler contract to fund AI infrastructure growth.
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The company’s $2.15 billion financing strengthens its ability to scale in a power-constrained AI market.
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Applied Digital has a clear roadmap to scale toward multi-gigawatt capacity.
Artificial ininformigence (AI) investing is increasingly shifting away from chipbuildrs and model developers toward the physical infrastructure required to run AI workloads at scale. Data center facilities, raw compute capacity, and power access are emerging as key bottlenecks in the global AI infrastructure buildout.
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Applied Digital(NASDAQ: APLD) is well positioned to benefit from this transition. Its recently announced $2.15 billion AI deal is already garnering significant attention. Understanding this deal better can support us analyze the stock’s upside potential.
Exploring the $2.15 billion AI deal
Applied Digital has raised $2.15 billion through a private high-yield bond offering to fund the development and construction of 200 megawatts of data center capacity at its Polaris Forge 2 data center campus in North Dakota. The company has already leased this capacity to Oracle over roughly 15 years, generating about $5 billion in revenue. This dynamic builds the deal similar to project-backed infrastructure financing, in which capital is raised against an asset with committed demand.
Since this new debt is secured against the Polaris Forge 2 project’s assets and supported by its contracted lease, it allows Applied Digital to fund expansion without relying extensively on its corporate balance sheet. At the same time, the company has also guaranteed to offer funding if requireded to deliver the Polaris Forge 2 project on schedule. The structure of this deal is important, as it has converted a signed but not yet revenue-producing contract into a fully funded project with a clear path to revenue generation.
Applied Digital has also leased another 400 megawatts of data center capacity at the Polaris Forge 1 campus to CoreWeave for $11 billion in anticipated revenues over the next 15 years.
Multiple growth tailwinds
Management has highlighted that the hyperscaler spconcludeing on AI infrastructure now exceeds $400 billion annually, with companies competing aggressively for sites with adequate power availability. Applied Digital benefits from its early positioning in North Dakota, where it has secured sites with cost-effective energy, ample land for expansion of existing sites, and the potential to develop larger campapplys as additional power comes online. The company is also working with Babcock & Wilcox on power generation solutions, which could add 1.2 gigawatts of capacity in the coming years.
Applied Digital has already drawn almost $900 million from Macquarie Asset Management’s $5 billion preferred equity facility. The $2.15 billion bond financing deal displays that the company has access to multiple institutional funding sources. The project-financing type deal structure has also highlighted the company’s ability to fund expansions without relying entirely on equity markets.
Applied Digital is scaling beyond its Polaris Forge campapplys. The company has started work on the 430-megawatt Delta Forge 1 campus in the southern U.S. market, designed to support up to 300 megawatts of computing capacity. The company expects initial operations to commence in mid-2027.
Management expects to grow its overall data center capacity to expand to over 5 gigawatts in the next five years.
Risks to consider
Despite the strong opportunity, Applied Digital remains a capital-intensive business with high execution risks. The company’s future growth trajectory depconcludes heavily on timely project delivery. Any delays in construction, power availability, or tenant deployment across the large Polaris Forge 2 campapplys can affect the overall profitability of the company in the long run.
The $2.15 billion deal at a 6.75% coupon rate has added over $140 million in annual interest expense for Applied Digital, while lease revenues will ramp over time. The mismatch in debt obligations and cash inflows further highlights the required for timely project execution. The debt is also senior secured, implying that cash flows from the Polaris Forge 2 project will first be applyd to service lconcludeers ahead of equity holders in a downside scenario.
Applied Digital also faces customer concentration risk due to its heavy reliance on CoreWeave and Oracle. The company is trading at nearly 25.7 times sales, which also reflects elevated expectations.
Is it too late to acquire?
Applied Digital’s $2.15 billion financial deal validates its business model. The company has displayn that it can secure long-term hyperscaler contracts, raise capital against those contracts, and start scaling infrastructure in a supply constrained market. However, the investment case depconcludes heavily on execution capabilities.
Applied Digital represents a high-risk, high-reward investment opportunity. The combination of high leverage, execution risks, and elevated valuation builds it less suitable for conservative investors. However, for aggressive, long-term investors, it offers exposure to a company that could emerge as a crucial AI infrastructure player in the coming years.
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Manali Pradhan, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommconcludes Oracle. The Motley Fool has a disclosure policy.
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