Applied Digital: Blockchain Industry And Growing Capacity Imply Undervaluation

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Applied Digital Corporation has robust demand across its businesses, and analysts expect EPS growth in 2025.The company has partnerships with large companies like Dell, NVIDIA, Goldman Sachs, and ...

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Undervaluation\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-16 20:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683989-applied-digital-apld-stock-blockchain-industry-growing-capacity-imply-undervaluation><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Applied Digital Corporation has robust demand across its businesses, and analysts expect EPS growth in 2025.The company has partnerships with large companies like Dell, NVIDIA, Goldman Sachs, and ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683989-applied-digital-apld-stock-blockchain-industry-growing-capacity-imply-undervaluation\">Source 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bring business growth.   PM ImagesApplied Digital Corporation (NASDAQ:APLD) recently noted robust demand across the globe and analysts expect growing EPS in 2025. The numbers delivered in the most recent quarter were lower than expected, however management mentioned a new LOI signed with a hyperscaler for a 400 MW capacity lease. I believe that the business profile of the CEO, the exposure to the blockchain industry, and existing partners will most likely enhance future capital supply and capacity generation. There are some risks from lack of financing, lower FCF growth than expected, or intense competition. However, I believe that APLD stock does look undervalued. Applied Digital Applied Digital is a designer, builder, and operator of next-generation digital infrastructure, with three main lines of business, artificial intelligence cloud services, high-performance data center hosting, and cryptographic data hosting.   Source: Investor PresentationThrough its Sai Computing brand, it offers cloud services for AI applications, with significant contracts secured. As for HPC hosting, the company has expanded its capacity, and has workable expansion plans. Additionally, in crypto data hosting, the company has a strong online infrastructure with long-term contracts and growth plans. The company distributes several services via long-term contracts. It has a strong concentration of clients in its crypto data hosting business, with agreements with entities such as Spring Mud, Bitmain Technologies Limited, and others. Similarly, in AI cloud services, the company has significant concentration with only two customers. Its strategy includes long-term contracts and using a combination of third-party colocation centers and its own HPC data centers to serve clients. Applied is expanding its operations, with plans to increase hosting capacity for HPC applications up to 200 MW besides launching AI cloud hosting services through Sai Computing. It seeks to minimize risks by collaborating with leading suppliers such as Super Micro and HPE. In a recent presentation, the company noted that it has data center locations all over the country. With data centers all over the country, I believe that management tried to be close to clients to offer quality.   Source: Investor PresentationAdditionally, the company is securing scalable energy sites and considering vertical integration of energy assets. Its site selection criteria focus on geographic diversity and environmental impact, seeking to minimize risks and maximize energy efficiency with a focus on renewable energy. Recent Earnings Results, And EPS Expectations In the last quarterly report, the company noted lower than expected EPS and lower quarterly net sales than initially anticipated. Total quarterly revenue was close to $43-$44 million, and EPS was $0.27 less than expected. Even considering the recent stock price volatility, I believe that the quarterly report included valuable information like the LOI signed with a hyperscaler for a 400 MW capacity lease. In addition, the company noted debt repayments of approximately $52.3 million and net cash received from operating activities close to $47.9 million coming from recurring operations. I believe that more leasing capacity, lower debt, and increases in the CFO like we saw in the recent quarter could accelerate the demand for the stock. With the recent past earnings, I think that the future looks considerably better than the last EPS figures. Analysts out there are expecting an increase in the EPS in 2025. Under my best case scenario, I assumed that continued increase in future expectations of net income growth from 2025 to 2034 would imply higher stock price marks. With that about the expectations of other analysts, I believe that the words from management given in the most recent quarterly report are beneficial. The company appears to be well-positioned to grow, and notes robust demand. Among other details given in the last press release, I think that the following words are worth having a careful look at. Looking forward, we are encouraged by the robust demand we are witnessing across our business. We believe we are well-positioned to execute our growth strategy and capitalize on the increasing opportunities presented by both traditional customers and emerging HPC applications. Source: Press Release Balance Sheet As of February 29, 2024, the company reported cash worth $4 million and restricted cash of about $29 million, which I did not include to calculate the net debt. I do not appreciate that the total amount of current assets is significantly below the current amount of liabilities. With that, it is worth mentioning that Applied Digital Corp. does not seem to require a lot of liquidity to function. Business providers seem to offer certain financing as accounts payable is not small. In addition, the company appears to sign a significant amount of leasing agreements for hosting equipment, office space, and land, which appears necessary to offer digital infrastructure. The Company has entered into leases for hosting equipment, office space, and land. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions. Source: 10-k   Source: 10-QWith an asset/liability ratio larger than 1x, the balance sheet appears quite healthy. With that, I believe that investors may want to study carefully the total amount of debt, which is not small.   Source: 10-QThere are also several contractual obligations to keep in mind. The company has obtained several loans to finance its expansion and operations. These include loans from Starion Term, Vantage Garden City, and Starion Ellendale, which finance the expansion of data centers at different locations. The company has also acquired a loan to increase liquidity and fund the AI cloud services platform. These loans have different interest rates and maturity periods, and the company must comply with certain conditions and covenants. In the last quarterly report, Applied Digital reported net debt worth $143 million, including finance lease liabilities and related party loans. Under my best case scenario, I assumed 2034 FCF close to $135 million, which would imply net debt/FCF close to 1x.   Source: Our Own CalculationsRecent Investments In Blockchain Data Centers May Bring Exposure To The Blockchain Industry. In a recent presentation, the company reported three blockchain data centers, which are expected to serve space to blockchain mining customers. The data centers are located in Texas and North Dakota.   Source: Investor PresentationThe data center colocation market is expected to grow at close to 7.25% CAGR from 2022 to 2028. However, the global cryptocurrency mining market could grow at close to 12.9% CAGR from 2023 to 2032. Hence, I believe that in the best case scenario, we could expect APLD’s net sales growth to be close to these figures. Under my best case scenario, I assumed median net income growth close to 8%-9%.  The data center colocation market was valued at USD 30.42 billion in 2022 and is forecast to grow at a CAGR of 7.25% from 2022 to 2028, reaching USD 46.3 billion in 2028. Source: Crypto Reporter  The global cryptocurrency mining market size surpassed USD 1.92 billion in 2022 and it is projected to attain around USD 7 billion by 2032, poised to grow at a CAGR of 12.90% from 2023 to 2032. Source: Precedence Research  Partnerships With Large Companies May Not Only Bring Net Sales Growth, But Also New Large Fintech Companies I believe that the number of strategic partnerships, software partners, and financial partners signed with APLD is impressive. Dell Technologies Inc. (DELL), NVIDIA (NVDA), The Goldman Sachs Group, Inc. (GS), and JPMorgan (JPM) are working with the company.    Source: Presentation To InvestorsIn my view, APLD will most likely receive more attention from other large companies thanks to these agreements. Besides, I believe that venture funds or new investors may be willing to buy more shares because these large corporations seem to trust the data centers offered by APLD. Under my best case scenario, I assumed that both cost of debt and cost of equity may be a bit lower than that of competitors because of these partners. The CEO Will Most Likely Bring The Interest Of Venture Capitalists, Which May Lower The WACC Among the members in the executive team, I believe that Wes Cummins, the CEO, will most likely bring the attention of investors in the venture capital industry. He founded 272 Capital LP, which he sold to a large bank in the United States. Given previous expertise in the technology hardware and software industry, I believe that APLD would most likely present its financials, and make smart decisions in the coming years. As a result, I believe that we could expect a decrease in the WACC as soon as more investors conduct research about its biography. Under the best case scenario, I assumed a WACC close to 8%-9%, which I believe is conservative.   Source: Company's WebsiteMy Best Case Scenario Implied A Valuation Of $8.2 Under this scenario, I assumed that recent investments in blockchain data centers, new partnerships with banks and tech companies, and the connections of the CEO will bring business growth. As a result, I expect median net income growth close to 8.1% from 2024 to 2034, driven by the demand for data centers in the blockchain industry. Note that I took into account previous cash flow statements, changes in working capital, capital expenditures, and previous net income growth. I believe that my figures are quite conservative. I assumed 2034 net income of $159 million, with net income growth of about 6.48%. I also forecasted stock-based compensation of $8 million, with prepaid expenses and other current assets close to -$4.9 million, customer deposits of $6 million, and deferred revenue of $0.2 million. In addition, with accounts payable and accrued liabilities worth -$4 million, CFO would stand at close to $166 million. Finally, assuming 2034 capex close to -$31 million, I obtained free cash of $135 million.   Source: Our Financial ExpectationsIf we also use a WACC of 8.75%, the implied net present value of future FCF would be close to $393 million. In addition, with an EV/FCF of about 14x, the implied total enterprise value would be $1.14 billion.   Source: Seeking AlphaIf we subtract the net debt, the implied equity valuation would be close to $1 billion. Finally, I obtained a target price close to $8.2 per share.   Source: Our Financial ExpectationsRisks In my opinion, the company is at a stage that faces challenges in management and financial resources. Rapid growth can strain management capacity and resources. Failure to manage growth could damage reputation and limit growth. Besides, failure to identify emerging opportunities can have a negative impact. The need for additional capital is anticipated for expansion and response to competitive pressures. Finally, obtaining financing may be difficult, which could impact growth and existing operations. Issuing equity can dilute shareholders' ownership, and debt can impose financial constraints. Competitors Competition in the digital industry is intense. The company faces constant challenges from established and emerging rivals. The ability to innovate, offer high-quality services, and quickly adapt to market trends will determine the success. Additionally, pursuing strategic collaborations and attracting key talent are crucial to staying ahead. The company must anticipate and proactively respond to competitive moves to secure its position in the constantly evolving market. My Worst Case Scenario Under my worst case scenario, the action of competitors, lack of financing, alternative technologies, and data centers could diminish future net sales growth and net income growth. In sum, I believe that figures are still quite realistic, however both net income growth and FCF are a bit lower than that in the best case scenario. I believe that this case scenario is a bit less likely than the best case scenario. In a less positive case, we could have 2034 net income of $50.3 million, with net income growth close to -5.32%. I also assumed 2034 depreciation and amortization of close to $1 million, stock-based compensation of about $5 million, and changes in prepaid expenses of close to -$0.5 million. Also, changes in customer deposits of about $4 million and changes in accounts payable and accrued liabilities of -$1.7 million would imply 2034 CFO close to $64 million. Finally, taking into account 2034 capex of -$7 million, 2034 FCF would be close to $57 million.   Source: Our Financial ExpectationsBy assuming a WACC of 10%, I obtained NPV of future FCF close to $238 million. Besides, if we also assume EV/FCF of 11.5x, the total valuation would be close to $468 million. Finally, subtracting net debt close to -$143 million, the implied fair price would be close to $2.7.   Source: Our Financial ExpectationsConclusion  Applied Digital Corporation recently noted robust demand across its businesses, and many analysts out there expect EPS growth in 2025. I believe that previous expertise in the technology hardware and software industry reported by the CEO and connections with other venture catalysts could bring new deals. In addition, with relevant partners and new leasing agreements such as the LOI signed with a hyperscaler for a 400 MW capacity lease, APLD could bring substantial capacity increases. Yes, the concentration of customers in some areas, intense competition, and lack of capital could damage future FCF growth. With that, I believe that APLD appears significantly undervalued at its current price mark.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427824198"}