Is Applied Digital's Stock Set to Surge With NVIDIA's Backing?

Key Points

• Applied Digital secured a $160 million strategic financing deal from institutional investors, including NVIDIA and Related Companies.
• Despite this boost, the stock is still down almost 50% from its 52-week high and 32% YTD, and it has a history of underperformance.
• Mixed sentiment surrounds the stock, with rising short interest and insider selling, but analysts remain bullish with an 80% upside forecast.

Applied Digital NASDAQ: APLD saw its stock soar nearly 20% last week after announcing a significant $160 million strategic financing deal through a private placement, priced at market value. This investment came from institutional and accredited investors, including tech giant NVIDIA NASDAQ: NVDA and Related Companies, one of the largest privately-owned real estate firms specializing in complex infrastructure and data center development.

Should investors take notice of Applied Digital, now backed by one of the world's most influential companies? 

Overview of Applied Digital's Core Services and Data Centers

Applied Digital designs, develops, and operates data centers across North America, providing critical digital infrastructure solutions for the high-performance computing industry. Its services range from artificial intelligence (AI) cloud services to high-performance computing and crypto data center hosting. 

Despite this futuristic focus, the stock's performance has been underwhelming. It has a history of lengthy downtrends and only occasional periods of liquidity above its 200-day simple moving average (SMA). Despite the boost from recent news, APLD is down nearly 50% from its 52-week high and remains negative 32% year-to-date.

Recent earnings results provide additional insight into the stock's struggles. On August 28, 2024, Applied Digital reported a ($0.52) loss per share, missing analysts' expectations by $0.29 while generating $43.7 million in revenue, slightly above the $42.7 million estimate. The underwhelming earnings miss adds context to why the stock has struggled to find momentum in recent months.

The News That Sent Applied Digital Soaring

Let's take a closer look at what catalyzed last week's surge. Applied Digital announced it had entered into definitive agreements for a $160 million private placement financing involving institutional and accredited investors. Among these backers are NVIDIA and Related Companies, both significant names in their respective fields. 

The placement is set at the market, with Applied Digital agreeing to issue 49,382,720 shares at $3.24 per share, representing the last closing price on September 4, 2024. The funds from this deal are expected to solidify Applied Digital's position as a leader in the accelerated computing space.

This strategic partnership with NVIDIA sends a clear signal about Applied Digital's potential. Having such a tech giant on board adds credibility to Applied Digital's operations and could help the company expand in crucial areas like AI infrastructure. Additionally, Related Companies' involvement further underscores the significance of Applied Digital's role in building the infrastructure that supports these emerging technologies.

Mixed Sentiment Around Applied Digital

Despite this financing deal's excitement, sentiment toward Applied Digital remains mixed. Analysts covering the stock are bullish, with five analysts giving it a Buy rating and an average price target forecasting an 80% upside from current levels. Notably, on September 5, Roth MKM reiterated its Buy rating with a $10 price target.

However, skepticism is evident, especially with the rise of short interest rates. As of August 15, short interest in APLD stood at 17.32%, a 6% increase from the previous month. Such a high level of short interest indicates that some market participants believe the stock could be overvalued or face significant challenges. A rising short interest suggests a bearish sentiment and an expectation that Applied Digital's stock price could fall further in the medium to long term.

Adding to the cautious sentiment is the lack of insider buying over the past year. Instead, insiders have been selling, with nearly $600,000 worth of stock offloaded through multiple transactions. 

Should Investors Be Cautious Despite NVIDIA's Support for Applied Digital?

With one of the world's most influential companies, NVIDIA, backing Applied Digital, investors have a compelling reason to pay attention. The $160 million strategic investment validates the company's potential in the digital infrastructure and AI space. However, mixed sentiment, including rising short interest and insider selling, should temper expectations.