Applied Digital Corporation’s (APLD Quick QuoteAPLD - Free Report) shares have plunged 27.4% since the company announced its third-quarter fiscal 2025 results on April 14. The stock has underperformed the broader Finance sector’s decline of 4.1%. The company reported a loss of 16 cents per share, wider than the Zacks Consensus Estimate of a loss of 11 cents.

APLD registered earnings of 52 cents per share in the year-ago quarter. Its revenues of $52.9 million missed the Zacks Consensus Estimate by 16.75%, primarily due to a sequential decline in the Cloud Services business.

This steep decline raises the question: Should investors cut their losses and exit, or is it worth holding on to? While the near-term headwinds are real, the long-term growth story for Applied Digital remains intact, making a strong case for holding the stock.

Price Performance Since Earnings

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Reason Behind APLD Stock’s Decline

The continued downtrend in the stock following the earnings release is likely due to its lower-than-expected quarterly performance. Moreover, the rising cost of sales amid higher depreciation costs related to its new facilities should keep the bottom line under pressure in the near term. Higher power costs also hurt Data Center Hosting business margin during the fiscal third quarter.

APLD’s revenue miss can be attributed to a 35.7% sequential decline in sales from the Cloud Services business due to technical hurdles related to the shift from single-tenant reserve contracts to a multi-tenant on-demand model. The company currently has six GPU clusters, among which four are still used under reserve contracts and the other two have been moved to the on-demand business model. However, this issue has been resolved and the company expects revenues to be on par with the earlier quarters.

Meanwhile, depreciation cost is likely to be on the higher side as APLD continues to build its infrastructure to support High-Performance Computing (HPC) Data Center Hosting business. The company has deployed nearly $1 billion in assets over the past year, the majority of which was allocated to the construction of data centers. It currently operates 286 megawatts of fully contracted data center hosting capacity, primarily for Bitcoin miners. Apart from this, APLD is constructing three buildings, which should increase the total capacity by 700 megawatts within 2027.

Although the construction of these buildings should drive potential revenue growth as they come live over the next two years, the company is yet to secure a deal for its expanded capacity. The first building to come online is the 400 megawatt Ellendale campus, which is expected to be online by 2025. However, without any revenue-generating lease, this investment is likely to have a significant unfavorable impact on the company’s gross margin.

Until a lease contract for its new data center is finalized, the company’s near-term performance is likely to be under pressure. However, recovery in the Cloud Service business from next quarters will help offset some of these pressures.

These factors are driving its top and bottom lines. The Zacks Consensus Estimate for its fiscal 2025 revenues is pegged at $223.1 million, indicating year-over-year growth of 34.7%. The Zacks Consensus Estimate for loss is pegged at 99 cents per share, indicating a year-over-year improvement of 24.4%.

APLD’s Valuation Looks Lofty

APLD stock is currently trading at a premium, as suggested by the Value Score of F. Despite its recent plunge in stock price, the company trades at a high forward 12-month price-to-earnings (P/S) ratio compared to the industry.

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APLD: A Likely Winner Over Long-Term

Although APLD’s shares have declined so far this year, its current share price offers an attractive opportunity to investors. The company is diversifying into a high-growth segment of high-performance computing with plans for setting up a capacity of 1.4 gigawatt over the next few years. The global high-performance computing market size was valued at $48.51 billion in 2022, per a Grand View Research report. The market is expected to witness a CAGR of 7.5% till 2030 to reach $87.31 billion. The capacity of HPC systems to process huge amounts of data at high speeds is encouraging academic institutions, defense agencies, energy companies, government agencies, and the utility sector to adopt these systems. Meanwhile, rising prices of Bitcoin and increasing adoption of artificial intelligence should support APLD’s growth story.

Applied Digital is also planning to sell its Cloud Service business to focus on its HPC business. Moreover, the sale will generate a significant amount of funds that APLD can invest in its data center business.

The company’s current trajectory positions it as a speculative “lottery ticket” investment. While lower local electricity costs in North Dakota can offer some competitive advantage, APLD still needs to secure key lease agreements and win over major hyperscaler clients. For investors with a high tolerance for risk, Applied Digital’s early-stage growth and potential for massive scaling in HPC hosting could translate into significant rewards.

Apart from these potential growth avenues, APLD can gain from its rich partner base, which includes Super Micro Computer (SMCI Quick QuoteSMCI - Free Report) , Hewlett Packard Enterprise (HPE Quick QuoteHPE - Free Report) , Dell Technologies, and NVIDIA (NVDA Quick QuoteNVDA - Free Report) . Additionally, NVIDIA disclosed that it owns 7,716,050 shares in APLD, which was valued at $58.95 million as of Dec. 31, 2024.

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Conclusion: Hold APLD Stock for Now

Although APLD’s share price has witnessed a sharp decline, the company may recover on the back of resolving technical hurdles related to its Cloud Service business. However, the margins are likely to remain under pressure. Considering these factors, we recommend investors to retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.