Executive Summary / Key Takeaways

• Applied Digital is rapidly evolving into a specialized AI infrastructure provider, leveraging purpose-built data center designs and strategic financing to meet unprecedented demand.
• The expansion of its CoreWeave lease to 400 megawatts (MW) at Polaris Forge 1 secures approximately $11 billion in contracted revenue over 15 years, providing significant long-term visibility.
• The company is aggressively expanding its footprint with Polaris Forge 2 underway and 700 MW currently under construction, targeting a $1 billion annual Net Operating Income (NOI) run rate within five years.
• Proprietary waterless cooling technology, a projected Power Usage Effectiveness (PUE) of 1.18, and accelerated build times (12-14 months) offer a substantial competitive edge in the capital-intensive AI data center market.
• Strategic asset-level financing, including a $5 billion facility with Macquarie Asset Management, de-risks capital requirements and provides a clear roadmap for funding its multi-gigawatt pipeline.

The AI Infrastructure Imperative

Applied Digital Corporation, founded in 2021 and headquartered in Dallas, Texas, has rapidly emerged as a critical enabler in the burgeoning digital infrastructure landscape. The company designs, builds, and operates high-performance, sustainably engineered data centers and colocation services tailored for artificial intelligence (AI), cloud, networking, and blockchain workloads. Its journey began with a focus on both Data Center Hosting for cryptocurrency mining and High-Performance Computing (HPC) Hosting, a foundational dual approach that has since strategically pivoted to prioritize the immense opportunities within AI.

The global investment in AI infrastructure is unprecedented, with publicly traded hyperscalers projected to invest over $350 billion in AI data centers this year alone. This extraordinary capital concentration rivals America's most ambitious historical infrastructure projects, yet it is compressed into a fraction of the time. The industry now recognizes that the primary bottleneck for AI deployment is no longer the availability of GPUs but the critical shortage of specialized data centers—often termed "AI factories"—capable of supporting the advanced power and cooling requirements of modern AI silicon. The Department of Energy estimates a power shortfall for data centers in the range of 40 to 50 gigawatts (GW) by 2028, with some experts suggesting this figure could exceed 90 GW. Applied Digital's overarching strategy is to directly address this supply-demand imbalance with purpose-built, rapidly deployable, and cost-effective data centers, strategically leveraging its northern campuses in the Dakotas for their abundant, low-cost, and sustainable energy resources.

Technological Edge: Engineering for the Future of AI

Applied Digital's core competitive advantage is rooted in its proprietary, sustainably engineered data center designs. These facilities are purpose-built for the demanding requirements of HPC and AI workloads, featuring an innovative closed-loop direct-to-chip liquid cooling system. This technology is optimized for cold-climate operation, enabling a projected Power Usage Effectiveness (PUE) of 1.18 and near-zero water consumption. These metrics represent significant tangible benefits, offering superior operational efficiency and environmental sustainability compared to many traditional data center designs.

The company's commitment to innovation extends to its operational execution. Applied Digital has meticulously streamlined its construction processes, reducing the number of component SKUs by approximately 50% and consolidating suppliers. This has dramatically shortened projected build times from 24 months to an impressive 12 to 14 months, allowing for faster and more efficient delivery of large-scale commitments. For a 100 MW data center customer, building in the Dakotas with Applied Digital's design could translate to potential savings of up to $2.7 billion over a 30-year period compared to existing industry data centers in other regions. These technological advantages form a robust competitive moat, directly contributing to lower operating costs, potentially higher margins, and quicker revenue generation. This positions Applied Digital as an attractive partner for hyperscalers seeking advanced, rapidly scalable, and environmentally responsible AI infrastructure, underpinning its market positioning and long-term growth strategy.

A Rapid Ascent: Operational Milestones and Strategic Partnerships

Applied Digital's strategic pivot towards AI infrastructure has been marked by a series of significant operational milestones and key partnerships. The company was among the first to break ground in 2023 on next-generation data center designs, anticipating the surging demand for AI compute. This foresight led to the development of its flagship Polaris Forge 1 campus in Ellendale, North Dakota. A transformative moment arrived with the expansion of its long-term lease agreements with CoreWeave, an AI hyperscaler. These leases now cover the full 400 MW of capacity under construction at Polaris Forge 1, representing approximately $11 billion in contracted revenue over a 15-year term. CoreWeave's engagement of Applied Digital for the tenant fit-out of the first 100 MW building further deepens this operational integration, showcasing APLD's value as a comprehensive strategic partner.

Building on this momentum, Applied Digital broke ground in September 2025 on Polaris Forge 2 near Harwood, North Dakota, a projected $3 billion, 280 MW AI Factory designed to scale to one gigawatt. Initial funding for Polaris Forge 2 has been secured from Macquarie Equipment Capital, with further equity funding planned through the Macquarie Asset Management (MAM) preferred equity facility. This $5 billion perpetual preferred equity facility with MAM, a global leader in infrastructure investment, is a cornerstone of APLD's financing strategy. It allocates $900 million to Polaris Forge 1 and provides a right of first refusal for an additional $4.1 billion across future HPC pipeline, with Macquarie taking a 15% common equity interest in the HPC business segment for assets they fund. This asset-level financing model is designed to fully fund build-outs and materially reduce future equity requirements at the public company level, potentially unlocking $20 billion to $25 billion in total capital when including project finance. The company also secured a $375 million financing arrangement with Sumitomo Mitsui Bank Corporation (SMFG), further validating its assets and pipeline.

Financial Performance: Fueling Growth Amidst Transformation

Applied Digital's financial performance in the fiscal first quarter of 2026 (ended August 31, 2025) reflects a company in a significant growth and transformation phase. Total revenue surged by 95% year-over-year to $64.2 million. This substantial increase was primarily driven by $26.3 million generated from tenant fit-out services within the HPC Hosting Business, alongside a $5 million improvement in the Data Center Hosting Business. While the fit-out revenue is a one-time, low-margin activity (mid-single digits), it is strategically vital, demonstrating the company's end-to-end service capabilities for hyperscalers.

Costs of revenues increased by 144% to $55.6 million, largely attributable to the $25 million in HPC tenant fit-out services and a $7.2 million rise in energy costs for the Data Center Hosting segment. Selling, general, and administrative (SG&A) expenses also saw a significant increase of 165% to $29.2 million, primarily due to a $16.6 million increase in stock-based compensation from accelerated employee award vesting and a $3.9 million rise in personnel expenses to support business expansion. The company reported a net loss of $16.9 million, compared to a net loss of $4.2 million in the prior year. Adjusted EBITDA for the quarter was $0.5 million, down from $6.3 million in the comparable prior-year period.

Segment-wise, the Data Center Hosting Business saw its operating profit decrease to $6.04 million from $35.85 million year-over-year, primarily due to a non-recurring $24.8 million gain on asset classification as held for sale in the prior year. The HPC Hosting Business, however, saw its operating loss narrow to $2.02 million from $2.95 million, benefiting from the initial fit-out revenue. The Cloud Services Business, now classified as discontinued operations, generated $16.72 million in revenue and a net income of $9.32 million, a significant improvement from a $20.16 million net loss in the prior year, driven by increased operating income and reduced interest expense.

Liquidity remains a key focus for a capital-intensive business like Applied Digital. As of August 31, 2025, the company held $73.9 million in unrestricted cash and cash equivalents. Net cash used in operating activities was $82.02 million, while net cash used in investing activities surged to $249.42 million, reflecting heavy investments in Polaris Forge 1 construction. These outflows were significantly offset by $322.24 million in net cash provided by financing activities, largely from common and preferred stock offerings. The company's asset-level financing strategy, notably the Macquarie Asset Management facility, is crucial, as it is expected to fully finance Polaris Forge 1 without additional equity contributions from the parent company, and future project financing for CoreWeave-backed leases is anticipated at a favorable 70% loan-to-cost with competitive interest rates.

Competitive Landscape: Carving a Niche in a Hyperscale World

Applied Digital operates in a highly competitive and rapidly evolving digital infrastructure market, contending with established giants and specialized players alike. Its primary direct competitors include global data center leaders such as Equinix (EQIX) and Digital Realty Trust (DLR), as well as more specialized blockchain and AI infrastructure providers like Core Scientific (CORZ).

Compared to Equinix, which boasts an extensive global footprint and diversified interconnection services, Applied Digital's market positioning is more specialized, focusing on purpose-built HPC data centers for AI. While Equinix benefits from superior scale, diversified revenue streams, and robust profitability, Applied Digital aims to lead in agility for AI-specific projects, offering quicker adaptation to HPC demands and potentially faster innovation cycles in cutting-edge AI technology. However, APLD's current gross profit margin of 14.46%, operating profit margin of -36.46%, and net profit margin of -115.55% reflect its aggressive investment phase, whereas Equinix typically maintains strong, stable positive margins.

Against Digital Realty Trust, a specialist in colocation and real estate for hyperscale cloud and AI providers, Applied Digital differentiates through its integrated HPC and cloud services tailored for AI, potentially delivering more specialized performance in computing tasks. Digital Realty leverages its real estate expertise for broader scalability and maintains strong profitability and cash flow from its established asset base. Applied Digital's value proposition emphasizes customized AI solutions and hands-on management of AI workloads, aiming for technological differentiation and potentially more efficient HPC designs for machine learning.

Core Scientific, another player in blockchain and AI infrastructure, shares Applied Digital's focus on high-density computing. However, Applied Digital's offerings may lean towards more integrated cloud services, providing greater versatility in AI applications, while Core Scientific has historically been more mining-centric. Both face volatility from crypto market fluctuations, but APLD's strategic pivot and asset-level financing aim to stabilize its growth trajectory.

Applied Digital's competitive advantages, or moats, stem from its early entry into next-generation AI data center designs, with its proprietary waterless cooling system and rapid build-out capabilities. Its design has been approved by four hyperscalers, validating its technical prowess. This proven ability to design and build at scale has attracted an "influx of power opportunities from third parties" that possess land and power but lack the expertise to develop hyperscaler-grade facilities. The company's streamlined construction process, reducing build times to 12-14 months, provides a significant speed advantage in a market where readiness is critical. However, Applied Digital faces vulnerabilities due to its relatively smaller scale compared to industry giants, which can prolong initial negotiations as a "first-time supplier" to hyperscalers. The company is proactively addressing competitive friction by divesting its Cloud Services Business, which was perceived as a competitor by potential data center leasing customers. This strategic shift is also intended to facilitate a future transition to a data center REIT structure, potentially lowering its cost of capital and enhancing its valuation multiples, which are currently impacted by market skepticism and reliance on key customers like CoreWeave.

Outlook and Growth Trajectory: A Clear Path to $1 Billion NOI

Applied Digital's outlook is characterized by aggressive expansion and a clear vision to capitalize on the insatiable demand for AI infrastructure. Management aims to achieve a $1 billion annual Net Operating Income (NOI) run rate within five years, a goal underpinned by the substantial CoreWeave lease, which alone is expected to support roughly half a billion in annual NOI. The Polaris Forge 2 campus, currently under construction, is poised to significantly increase this figure.

The company expects meaningful revenues from its HPC Hosting Business to commence as the first 100 MW building at Polaris Forge 1 becomes operational in calendar Q4 2025. This will be preceded by a significant ramp in tenant fit-out revenue in fiscal Q2 2026. Subsequent buildings at Polaris Forge 1 are scheduled to come online, with the second 150 MW facility ready for service by the end of calendar Q2 2026 (revenue generation in Q3 2026) and the third 150 MW facility in calendar Q1 2027. Applied Digital is actively expanding its footprint, with plans to break ground on one to two additional campuses before the end of calendar year 2025. Polaris Forge 2 is projected to bring its first building online in late 2026 and reach full capacity in 2027. The company's "robust multi-gigawatt pipeline" is growing, and it anticipates proceeding with at least one third-party project this year, leveraging its specialized design and build capabilities. General and administrative expenses and operating expenditures are expected to increase in line with this expansion, with significant capital investments in property and equipment continuing through fiscal year 2026.

Key Risks and Mitigations: Vigilance in a Dynamic Market

Despite its compelling growth trajectory, Applied Digital faces several pertinent risks inherent in a rapidly evolving and capital-intensive industry. The regulatory landscape for AI and blockchain hosting services is rapidly evolving, with increased scrutiny and potential new regulations on energy consumption and AI development that could significantly impact operations. The company is proactively monitoring these developments to ensure compliance.

Execution risk remains, particularly in meeting ambitious construction timelines. While Applied Digital has shortened its build times to 12-14 months, the industry at large may experience a "shakeout" where new entrants fail to meet construction deadlines, potentially leading to project delays. Supply chain disruptions, especially for long-lead equipment like transformers, also pose a risk, though APLD has mitigated this by securing key partners and narrowing SKUs. Financial risks include the need to continuously raise capital for its extensive pipeline. While the Macquarie Asset Management facility significantly de-risks equity funding, the company's ability to secure project-level debt on favorable terms remains crucial. Furthermore, the "longer and more complex" due diligence process with hyperscalers, particularly as a "first-time supplier," could delay lease finalizations, impacting revenue recognition. The company also faces potential late delivery penalties in its lease agreements. In its Data Center Hosting segment, there is always the risk of non-renewal for Bitcoin hosting contracts, with current agreements at Ellendale and Jamestown having approximately two years remaining. The decision to divest the Cloud Services Business, while strategic, introduces the risk of successful execution of that sale. Lastly, regional regulatory hurdles, such as the lack of a sales tax exemption for IT equipment in South Dakota, could be a "gating item" for development in certain promising locations.

Conclusion

Applied Digital stands at the forefront of the AI infrastructure boom, strategically transforming itself into a specialized, high-performance computing data center powerhouse. Its proprietary, sustainably engineered designs, exemplified by the Polaris Forge campuses, offer critical technological advantages in efficiency, speed, and environmental responsibility, directly addressing the industry's urgent need for "AI factories." The substantial, long-term contracted revenue from CoreWeave, coupled with a robust multi-gigawatt pipeline and strategic asset-level financing, provides a clear pathway to achieving its ambitious $1 billion annual NOI target within five years.

While challenges such as regulatory evolution, execution risks in rapid expansion, and intense competition persist, Applied Digital's proactive approach to technological innovation, operational streamlining, and strategic partnerships positions it favorably. The company's ability to consistently deliver purpose-built infrastructure for the world's leading hyperscalers, while optimizing its capital structure and mitigating competitive friction, underscores its compelling investment thesis as a foundational enabler of the intelligence era.