Analyze the reasons for the big dump in Applied Digital's stock price this week.

Key Points

• Applied Digital and CoreWeave expand collaboration, with a total contract value increasing to $11 billion.
• The company needs to raise funds to meet the huge capacity demand.
• The 10 stocks we prefer do not include Applied Digital.

This week, Applied Digital's stock price with Nasdaq ticker symbol: APLD( fell by 13.1% as of Friday's closing. During the same period, the S&P 500 index and the Nasdaq 100 index rose by 0.3% and 0.1%, respectively.

The artificial intelligence data center company announced last week that it has signed an additional lease agreement for 150 megawatts )MW( with CoreWeave. Investors weighed valuation issues and how to raise funds for capacity expansion, leading to a decline in stock prices this week.

Applied Digital Secures Huge Contract, but Execution is Questionable

Applied announced that CoreWeave will lease an additional 150MW capacity at its North Dakota facility, bringing the total expected contract rental revenue for Applied Digital to approximately $11 billion, which includes the previously announced $7 billion.

To illustrate this scale, Applied Digital's current market value is approximately $3.6 billion, which means the value of this partnership is more than twice the company's overall market value - although this revenue will be realized in installments over 15 years.

Applied Digital is currently facing the challenge of financing large-scale expansion for actual construction and existing infrastructure. The company needs to build three independent data centers within the next two years, which will require significant capital expenditures, while borrowing costs remain high.

Valuation concerns still exist

The opportunities are enormous, but the risks are also significant. The company is already burdened with a large amount of debt and needs to borrow more funds at high interest rates or dilute its shares. Moreover, having a single customer account for such a large proportion of revenue is a risk in itself, especially when that customer is also highly leveraged and relies on a very small customer base.

The risks here are too high; I recommend avoiding Applied Digital's stock—by the way, CoreWeave's stock should also be avoided.

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Johnny Rice does not hold any stocks mentioned in the article. Motley Fool does not hold any stocks mentioned in the article. Motley Fool has a disclosure policy.