Applied Digital easily beat estimates in Q1 with revenue up 69% QoQ with fit-out revenue contributing significantly in the quarter as the company prepares to roll out its first phase for CoreWeave. Barely two weeks after the earnings report, Applied signed a $5 billion, 15-year lease at Polaris Forge 2 with an unnamed, investment-grade hyperscaler, which helps de-risk its story from being tied solely to CoreWeave. Combined with the neocloud’s lease at PF1, the two deals for will generate $1.07 billion in average annual revenue over the lifetime of the contracts, or ~5X fiscal 2025 revenue, highlighting the attractiveness of pivoting to AI data centers.
More importantly, Applied also quietly disclosed that they have 4GW in the pipeline with additional capacity under review, doubling from our prior update Applied Digital: Bitcoin Miner Hinting at Rare, Hyperscaler Deal, and nearly 3X more than the 1.4GW disclosed two quarters ago. With only 600MW currently contracted at PF1 and PF2, this hints at substantial upside to contracted revenue and net operating income at full scale.
Applied Extends Active Pipeline to 4.3GW, the Highest Among Miners
Perhaps the most important update coming from Q1’s earnings call was that Applied has quickly and quietly expanded its active development pipeline – just two quarters ago, the company disclosed 1.4GW in the pipeline, yet now it has tripled this to 4.3GW this quarter across nine sites. This would rank Applied atop the leading miners, outpacing Galaxy’s 3.5GW and IREN’s 2.9 GW of grid-connected power.
Source: Applied DigitalApplied Digital
For the 4.3 GW, CEO Wesley Cummins explained that these are projects “we feel could move into that construction box in the next 6 to 12 months, and some of those could be even sooner. So those are things we're actively working on with permitting, with power, with all of those pieces that we think in the next 6 to 12 months can move into the construction pipeline.” He added that there is demand for sites ranging from hundreds of MW to a multi-GW scale, with emphasis on sites “built in a single location so that you get the cost advantages of building a scale in a single location,” which Applied’s pipeline covers with sizes from 250MW to 1GW+.
This is especially important as Applied continues to reiterate its ability to shorten its construction timelines, from 24 months down to 12 to 14 months. Management is working to match the pace of building with power delivery, starting construction early to ensure buildings are prepped and ready once power is available. Essentially, Applied is hinting that with limited holdups from permitting, with smooth power delivery and necessary financing, it could bring its pipeline to power in as quickly as two and a half years.
This could make the company increasingly more attractive from hyperscalers as other miners are not targeting having even 1GW online by the end of 2027 – management also disclosed that they have “entered negotiations with 2 additional hyperscalers for 2 new locations,” with 100MW under negotiation.
Should this pipeline materialize to operational capacity, Applied’s revenue and NOI opportunities could be 6X its current contracted capacity of 600MW. Assuming deal terms similar to PF1 and PF2, the remaining 3.7 GW pipeline could be worth $6.1 billion to $6.7 billion in average annual revenue, compared to the $1.07 billion in average annual revenue it has currently contracted out.
$5 Billion Lease Secured at Polaris Forge 2
Applied broke ground on Polaris Forge 2 in September, with the facility having an initial 300MW capacity. Applied said in Q1’s call that it has secured financing for the project via Macquarie with an expected cost of $3 billion, or $10 million per MW.
On October 22, Applied announced that it had signed a $5 billion, 15-year deal with an unnamed hyperscaler for 200MW capacity at PF2. On the headline, this is a slight discount to CoreWeave’s lease at $1.67 million per MW per year on average versus $1.83 million per MW per year, with a slightly lower NOI margin of ~86% +/- 3% versus 88% for CoreWeave’s deal. Management explained that having the hyperscaler provides a lower cost of capital, thus the spread between capital cost and revenue is approximately equal.
Securing this second deal with a major hyperscaler is important as it helps de-risk the story from being linked to CoreWeave, whose financials are upside down and require creative ways to raise cash to finance lofty growth ambitions.
“Firmly” On Track to Reach $1B NOI Target in 5 Years
While the hyperscaler engagement at PF2 is certainly good news to hear, management provided a snapshot into long-term net operating income (NOI) targets, providing a clearer view of how the deals will translate into earnings.
Management stated that they believe they can reach an “annualized NOI run rate of approximately $500 million once Polaris Forge 1 is fully operational,” while the “tenant signing at our second campus should put us firmly on the path toward our $1 billion NOI target within the next five years.”
At full scale, the 600MW of contracted capacity would translate into approximately $932 million in NOI based on expected margins of 88% and 86% across its two deals. Looking further out to Applied’s current active pipeline, the remaining 3.7GW could generate around $5.5 billion in annual NOI on average at full scale at similar margins.
While not a true comparison to NOI, analysts currently project Applied’s EBITDA to rise more than 10X by 2028, from $60.7 million expected this fiscal year to $640.2 million as these two deals begin to ramp towards full capacity. This would represent an expansion of EBITDA margin from 20.4% to 66%, still below targeted NOI margins. Additionally, there is the potential for EBITDA to rise by another factor of 7-8X in the long run if Applied can successfully commercialize its entire active development pipeline.
Project Financing Deal with Macquarie Unlocks 5X More Capital
As we discussed in our prior analysis, financing partnerships and capital raises are central to funding Applied and its HPC buildout. In Q1, the company drew $112.5 million from its $5 billion preferred equity financing with Macquarie, which management says helped fund the completion of PF1.
Applied also secured $50 million from Macquarie Equipment Capital, to help fund the groundbreaking for PF2, while also adding that it intends to tap the $5 billion vehicle to help fund the subsequent buildout. Additionally, Applied noted that subsequent to the quarter, it raised an $200 million from an expanded offering of its Series G Preferred Stock, providing more capital to fund these buildouts.
In the earnings calls, management noted that they may have the ability to finance both PF1 and PF2 by themselves, but they would prefer to tap the project financing from Macquarie as it lets them unlock significant capacity growth:
“When you look from a capital perspective, what we're seeking to do there is we could finance the Ellendale campus Polaris Forge 1 by ourselves. We probably even finance Polaris Forge 2 by ourselves.
But what we're trying to put in place and what we have put in place now is the ability for us to scale much larger. We're looking more into the future and putting a mechanism in place that eliminates or minimizes the dilution at the public company for a set amount at the subsidiary for Macquarie. And this allows us to go forward. The Macquarie Capital, $5 billion of capital really unlocks $20 billion to $25 billion of total capital for us when you include project finance and that allows us to build a significant amount of capacity.”
Instead of being capital constrained with two builds, Applied believes the $5 billion line from Macquarie could allow them to build >2GW with the amount of capital it can unlock.
Brief Update on Polaris Forge 1, South Dakota Development
Applied Digital this week announced that the first 50MW phase for CoreWeave is now ready for service, with the remaining 350MW to be rolled out in phases through 2027.
The fit-out of PF1 contributed $26.3 million in revenue in the quarter, with this expected to ramp significantly in the first part of fiscal Q2 leading up to the start of service in late October. Now that the first 50MW phase is online, lease revenues will begin ramping in the latter half of fiscal Q2 ending November and ramp further in Q3 as the next 50MW comes online by year-end.
Applied also provided a brief update on progress in South Dakota, where it was reported back in May 2025 that the company was planning to construct a $16 billion, 430 MW data center. Management said that power would be available in South Dakota in 2026, though the one piece they say is the gating factor for development is a sales tax exemption for IT data center equipment.
Financials
Revenue Surges 69% QoQ, Driven by CoreWeave Fit-out
Applied’s revenue rose 69% QoQ and 84% YoY to $64.2 million, driven primarily by the fit-out of Polaris Forge 1, which contributed $26.3 million in tenant-fit out revenue. This was more than 41% ahead of estimates for $45.5 million in revenue.
For fiscal Q2, revenue is expected to be $82.2 million, up 28.7% YoY and 28% QoQ. Fiscal Q3 (ending Feb 2026) is currently projected to see $71.4 million in revenue, up 35% YoY but down (13.1%) QoQ as fit-out revenue shifts to lease revenue.
Fiscal 2026 revenue is expected to be $297.3 million for YoY growth of 106.2%, with fiscal 2027 (ending May 2027) currently projected at $553.0 million for 86% YoY growth.
Operating Margin Improves Despite Gross Margin Pinch
Gross margins felt a pinch in Q1 due to the ramp in fit-out activity, though operating margins improved from Q4 yet remain a decent distance from GAAP profitability.
- GAAP gross margin was 13.4% in Q1, down from 20.5% in Q4 and 27.6% a year ago due to increase in low margin fit-out revenue. Applied said the $26.3 million in fit-out revenue carried a cost of $25 million, implying barely a 5% gross margin. The ramp of fit-out in Q2 may further pressure gross margin though this should ease by Q3 as lease revenue arises.
- GAAP operating margin was (34.7%) in Q1, up from (54.5%) in Q4; the 72.6% year-ago comp is not necessarily comparable due to a $24.8M gain on assets held for sale. Adjusted operating margin was (5.6%), improving from (8.1%) in Q4 but down from 6.2% in the year ago quarter.
- GAAP net margin was (28.8%) in Q1, improving from (70%) in Q4 and not comparable to the 45.5% from the year ago quarter. Adjusted net margin was (11.8%), improving from (19.9%) in Q4 but down from (2.3%) a year ago.
EPS Beats, but Not Yet Profitable
Applied beat on EPS in the quarter, with adjusted EPS of ($0.03) coming in well ahead of the ($0.16) estimate. GAAP EPS also beat at ($0.07) versus the ($0.13) estimate.
Looking ahead to Q2, GAAP EPS is expected to dip slightly to ($0.11), likely driven by margin pressure related to the ramp in fit-out revenue, before rebounding slightly to ($0.09) in Q3. For fiscal 2026, GAAP EPS is projected at ($0.45), before improving to ($0.27) in fiscal 2027 and shifting to a profit of $0.86 in 2028.
Cash Flows Heavily Negative on High Capex
Cash flows were heavily negative, with FCF margin widening to (516%) in Q1 driven by a sharp increase in capex.
- Operating cash flow was ($82.0 million) for (127.7%) margin, down from 18.0% in Q4 but improving from (217.8%) in the year ago quarter.
- Free cash flow was ($331.4 million) for a (516.1%) margin, driven by $249 million PP&E purchases. This compared to a (503.5%) margin in Q4 and a (375%) margin in the year ago quarter.
- Cash and equivalents totaled $114.1 million, not including Applied’s $362.5 million raise subsequent to quarter-end. Debt totaled $687.3 million.
Conclusion
Applied’s second deal with a hyperscaler customer at PF2 boosts confidence in its AI data center hosting story and de-risks it from CoreWeave, putting it firmly on track to reach its $1 billion net operating income target by 2030, up from $60.7 million expected this fiscal year. Additionally, Applied disclosed that they have an active pipeline of 4.3 GW but with only 700 MW of capacity under construction, highlighting that revenue and NOI opportunities at full scale could be up to 6X larger at similar terms.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in APLD at the time of writing and may own stocks pictured in the charts.
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