The energy crisis brought about by AI is a strong thematic hat will surface many opportunities for stock investors, yet it’s those companies that supply power quickly that we are building our portfolio with.
As a Bitcoin miner, Applied Digital has repositioned itself as an AI data center energy stock, with campuses primarily in the Dakotas. With long-term lease agreements — including multi-hundred-megawatt deals with AI cloud providers like CoreWeave — Applied Digital is a front runner that offers lower power usage effectiveness (PUE), an important metric that measures how much electricity is consumed by a data center. This PUE is achieved through free cooling as the Dakota region is colder than other regions and has surplus power the State exports. The company also hinted they are in advanced, direct negotiations with a hyperscaler. If this is confirmed, it will be the first among the miners to sign a direct deal.
With that said, many Bitcoin miners offer financials that are deep in the red yet are expected to sharply rebound from the high-margin revenue that AI data center deals will provide. Layer-in that Bitcoin miners have a highly volatile trading history, and what you get is a high risk/high reward approach to participating in stocks that promises to solve AI’s largest bottleneck – which is that AI's power consumption is outpacing what the grid can supply.
For investors, the challenge in participating in this trend is two-fold – how to identify opportunities in the vast energy sector and how to manage volatility given the margins and cash in this sector is lumpy (to put it kindly). We recently covered Bitcoin miners in our analysis “Bitcoin Miners Addressing AI’s Near-term Time to Power Bottleneck with up to $50 Billion in Commitments"Bitcoin Miners Addressing AI’s Near-term Time to Power Bottleneck with up to $50 Billion in Commitments"
As stated in the analysis: “Instead of having to worry about the prolonged process of site selection, permitting, planning, and more before final power delivery, these neoclouds instead have near immediate access to the powered shell. While retrofitting for liquid cooling, networking and connectivity may still be necessary and pose some challenges, [Bitcoin] miners offer a fast time to operation and relatively cheaper capex costs for a hyperscale-size data center outfitted with tens to hundreds of thousands of GPUs.
Bitcoin miners can only meet a fraction of this growth, likely around several gigawatts in total. Yet their innate ability to deliver this power over the next 12 to 24 months, supporting up to hundreds of thousands of high-end GPUs in larger-scale facilities, is why miners are prime targets to meet hyperscalers and neoclouds’ immediate power needs.”
Below we look at Applied Digital in more detail, the first in a Series of Bitcoin Miners that we have planned for our premium members over the coming weeks.
Note, this is a momentum stock and we plan to adhere strictly to risk management.
Applied Digital Located in the Dakotas with PUE of 1.18
Applied Digital made a strong argument in a recent white paper that offering a more strategic location in the Dakotas can result in savings of up to $60 to $90 million per year by offering free cooling.
We’ve covered in the past the importance of liquid cooling, as AI/ML require massive amounts of data processing, and as future generations of CPUs and GPUs are released, these systems will exceed air cooling capacity. Liquid cooling solves throttling, which occurs when CPUs and GPUs overheat and are throttled back to avoid damage to the chip. In the case of high-performance computing, liquid cooling reduces total cost of ownership as air cooling requires air conditioning and server fans to run constantly.
Cooling data center servers is responsible for 40% of the data center energy consumption. According to Dell, enclosed DLC solutions can save up to 23% of energy compared to traditional air-cooled racks. McKinsey places this number at 27% savings when there is 75% liquid cooled and 25% air cooled servers.
What Applied Digital is proposing is that mechanical liquid cooling is not needed as much in cooler regions such as the Dakotas, stating their mining operation “uses ambient air to cool liquid directly – no mechanical refrigeration needed for significant portions of the year.”
This represents a PUE improvement from the industry average of 1.58 to Applied Digital’s stated 1.18, translating into estimated annual savings of $60–90 million. In the example below, the calculation highlights $84 million in savings, driven by a significantly lower cost per kilowatt-hour.
Source: Applied Digital white paper
When comparing the Dakotas to other regions, such as North Virginia and Texas, the Dakotas have surplus energy with 33% exported compared to these other power-constrained regions. The region also offers 220 days of free cooling, which drives the power savings described above.
Management discussed these benefits in the recent earnings call, stating: “This design seeks to achieve a projected PUE of 1.18 and near 0 water consumption intended to ensure exceptional efficiency and sustainability. We like this location for its abundant low-cost synergy, some of which is generated from stranded power with over 200 days of free natural cooling. We have calculated that 100-megawatt data center customer could save up to $2.7 billion over a 30-year period as compared to the current industry data centers in other regions.”
CoreWeave is Primary Customer; Potential Incoming Hyperscaler(s)
As it stands, CoreWeave is the primary customer for Applied Digital’s capacity. Last quarter, CRWV signed a 15-year lease agreement for 250 MW and an extension for 150 MW for the Polaris Forge 1 data center site located in Ellendale, North Dakota.
The roll-out is expected to look like this:
- First 100-megawatt facility scheduled to be operational in Q4 of 2025
- Second 150-megawatt facility coming online in mid-2026
- Third 150-megawatt facility planned for 2027
There are two paths to revenue for this deal. The first is “fit-out” revenue where Applied Digital is paid to prepare the site. This revenue is expected to kick-in for the current quarter and next quarter, leading to a “significant sequential” increase in revenue. From there, the lease deal is worth $11 billion over a 15-year time frame, or about $733M per year averaged out.
Here is what was stated: “We expect revenue to increase significantly sequentially, beginning in the quarter ending for August 2025 due to the technical fit out of our first Polaris Forge 1 building. Note, our customer pays the cost of this fit-out with a small margin to the company. This fit-out revenue will largely be recognized in both the current fiscal quarter and as well as the quarter ending November 30, 2025. Now this is before the actual lease revenue for the facility begins to be recognized.”
CoreWeave has a few strategic advantages over hyperscalers when it comes to pursuing energy deals with hyperscalers. The first is the speed in which a smaller company like CoreWeave can negotiate, the second is the company’s willingness to acquire power that is located away from major metro hubs, and third, CoreWeave’s core business is supply fast and AI-optimized access to GPUs, whereas Big Tech has many priorities across their core segments.
However, with that said, the market will favor any miner that can sign a hyperscaler given CoreWeave’s financials are upside down and require creative ways to raise cash to finance their ambitions. When it comes to a steady, stable flow of cash for a Bitcoin miner (who they, themselves have high debt leverage), there is no better customer than a hyperscaler. You can think of CoreWeave signing lease deals with Bitcoin miners as somewhat of a house of cards – it works well when stocks are up, it does not work well if we go through a longer period of AI softness.
This is where Applied Digital stands out – the company has hinted they are in negotiations with two hyperscalers with one of the hyperscalers being in “advanced negotiations.” Management made sure to point out how rare it is for a Bitcoin miner to have a hyperscaler as a potential customer.
The crux of the issue for Bitcoin miners is the quality and longevity of these stocks as they will have to diversify beyond cash-strapped neoclouds to raise their credit ratings and offer investors visibility in terms of funding the construction of these massive multi-billion dollar projects. Therefore, I’m quoting in full the discussion on the high likelihood that Applied Digital not only secures a hyperscaler deal – but do so soon:
“Besides CoreWeave, we have completed the diligence and onboarding process with 2 other investment- grade North American hyperscalers […] We also expect to benefit from this competitive advantage as new entrants to the market confront time, money and effort it takes to overcome these industry syncretic barriers to entry for other players. We also, for us, we feel we are now in a position to do business with these companies in the future with a much shorter negotiating and contracting completion process. In fact, we are currently in various stages of negotiation with several investment-grade hyperscalers for large capacity campuses other than our Polaris Forge 1 campus with 1 of those negotiations being in an advanced stage.”
How Quickly can Applied Digital Add Capacity (and How Much):
Applied Digital has a few paths for announcing more deals. The first is that Polaris 1 offers 1GW of capacity and yet CoreWeave has contracted 400 MW of the available 1 GW.
Secondly, Applied Digital broke ground on a new $3 billion campus this month called Polaris 2 in Harwood, North Dakota. This new campus is expected to “scale beyond scheduled operations in 2026 and full capacity in early 2027.”
In terms of size for Polaris 2 and stated delivery for full capacity by 2027, the following was shared in the call indicating it could be at least 1 GW and will be completed in 12-14 months time: “Building on the momentum from these leases and the surging demand for AI infrastructure, we're actively marketing our multi- gigawatt pipeline to a diverse group of customers. […] As a result, we believe we've reduced our projected build times from 24 months to 12 to 14 months, allowing us to deliver on large-scale commitments faster and more efficiently than before.”
Note, the exact size and timeline was not officially provided yet the comment above helps to frame initial expectations.
The Value of 2 GW
If we assume Applied Digital will lease 2G by early 2027, and if we figure that each 400 MW is worth $73 million based on the CoreWeave deal, then a rough estimate of what Applied Digital's AI factories will be worth is $18.25M per 100MW. This means the total 2GW is roughly worth $365 million. This does not take into account the “fit-out” revenue, which we will get a better idea of in the upcoming quarter.
Given the 2027 estimates are for $501 million in revenue, taken at face value, one could argue Polaris 1 and Polaris 2 are priced in. This does not take into account additional sites, and if a hyperscaler pays more than what CoreWeave is paying. According to commentary on the call, APLD may be breaking ground on a third site: “We do expect to break ground and work has already started for that on 1 additional campus and potentially 2 before the end of this year.”
Project Costs and Financing
When we look at capex costs of $11-$13 million per 100 MW, the cash flow for Applied Digital should pay for the project costs. Financing partnerships and capital raises are central to funding APLD and its HPC buildout. For example, Macquarie has committed up to $5 billion, with $900 million already allocated to Ellendale and $4.1 billion available for future development. In addition, Applied raised roughly ~$875 million in FY25 though equity and debt financing, with another $268.9 million post-quarter.
Cash / Debt Position: At the end of Q4 FY25, cash stood at $120.9 million and debt at $688.2 million, yielding a Cash / Debt ratio of .18x. Including the post quarter raise, the ratio improves to 0.57x, providing significantly more liquidity runway. Still, this lags peers such as IREN (0.59x) and RIOT (0.38x), while being broadly in line with WULF (0.18x).
As you can see from the tables below, Applied’s Cash / Debt ratio has been extremely volatile. FY24 cash levels hovered around $30-40 million with minimal debt, spiked to $314 million in Q2 FY25 due to financing inflows, and declined again as capex surged in Q3 and Q4. This underscores the company’s reliance on external financing, followed by rapid deployment into HPC infrastructure.
Looking deeper into the Company’s investor base, another strong signal comes from Nvidia’s involvement. In September 2024, NVDA participated in APLD’s $160 million private placement financing, landing NVDA a ~3% stake in the Company valued around $63.7 million at the time. Importantly, Applied was already recognized as a Preferred NVIDIA Cloud Partner prior to this deal, meaning the investment represents more than just capital, it reinforces strategic alignment. For Applied, having Nvidia on the cap table provides credibility, potential preferential access to GPU’s, and validates the Company’s pivot into high-performance compute hosting. Relative to peers, few digital infrastructure firms can point to this level of backing, which helps APLD as a trusted partner for hyperscalers and AI-native cloud firms.
While historical financials illustrate the growing pains of a transition year, investors should focus on the Company’s financing position and go-forward revenue estimates, which accelerate meaningfully over the next four quarters. The $7 billion contracted HPC backlog implies a structural step-up in revenue visibility, while the post-quarter raise improves the cash/debt ratio from .18x to .57x, extending liquidity runway. These forward-looking metrics are more indicative of Applied’s trajectory than backward-looking margins which are distorted by non-cash charges and build-out spend. Ultimately, Applied’s ability to balance its liquidity runway with execution on HPC energization will determine whether the $7 billion in contracted backlog translates into the sharp revenue acceleration that analysts expect.
Revenue
Revenue optics are noisy due to Cloud Services fluctuations, but the underlying Hosting growth is much healthier than the FY headline suggests. The Q4 exit run-rate and $7 billion plus in HPC lease backlog indicate a more favorable forward profile.
Q4 Revenue came in at $38.0 million, representing 41% growth YoY and 4% growth QoQ. YoY growth reflects Ellendale operating at full capacity (vs. partial outages in Q4’24) and the transition away from related-party contracts, leaving a more third-party-driven base. QoQ growth of $1.5 million shows the strength of Hosting revenues amid Cloud Services decline, which was reclassified as “held for sale”.
FY2025 Revenue of $144.2 million represents 6% YoY growth or $7.6 million compared to $136.6 million in FY24. The growth this year looks weak compared to FY24, mainly due to the termination of legacy contracts in Q1‘25 and inconsistent Cloud Services revenue across the fiscal year.
While FY25 revenue printed slightly below consensus ($144.2 million vs. $148.0 million), the shortfall was isolated to Cloud Services, which has since been discontinued. Hosting was broadly in line, underscoring the durability of the core business. As you can see in the chart below, analysts expect top-line growth to accelerate sharply moving forward, with estimates calling for $250 million in FY26 and $502 million in FY2027. These strong forward estimates help explain why shares have traded less on historical misses and more on execution / timing of HPC energization.
Shifting our focus toward the segment breakdown, Hosting is the durable core business with stable recurring revenues between $35 – $38 million per quarter. As mentioned above, Q4 marked the first time both Jamestown (106 MW) and Ellendale (180 MW) facilities ran at stable full capacity.
Cloud Services drove growth early in FY25 during Q1 and Q2, shrank in Q3, and has now been re-classified as held for sale. These fluctuations are largely driven by GPU contract structure changes and management’s decision to wind down the unit.
HPC / AI Leases are not currently contributing to FY25 revenue but these are critical for the Company’s trajectory and should be viewed as the growth driver. Management highlighted that signed leases with Coreweave represent $7 billion in contracted revenue to be recognized over 15 years. For added context, this contract alone is roughly 49x FY25 revenue of $144.2 million. Suffice to say, the Company is undergoing transition among its key segments but the strong backlog implies a change in trajectory.
Margins: Underlying gross margin strength offset by OpEx, SG&A caution signal
Gross margin trend is positive but material swings in Opex and financing costs mask any improvement. Q4 spike in SG&A is a red flag on cost control that should be monitored going forward. The key takeaway here is that unit economics are improving at the gross level but cost discipline and financing overhands remain key risks.
Q4 gross profit of $7.8 million, down $7.6 million or 49% compared to Q3, but up $3.7 million or 90% compared to Q4’24. Gross margins of 20.5% vs. 15.2% in Q4’24 reflect 530 basis points of improvement, driven largely by the increase in revenue, along with better facility uptime and efficiency, plus mix shift away from lower-margin Cloud Services.
Q4 operating income of ($20.7) million, $1.7 million lower than Q3’25 and $18.0 million lower than Q4’24. Operating margin of (54.5%) is down substantially from (9.9%) in Q4’24 and heavily pressured by a 115% increase YoY in SG&A spend as the company expanded headcount, increased stock comp, and ramped corporate overhead associated with the HPC buildout.
Q4 Net income of ($26.6) million reflects sequential improvement of $30.1 million against Q3’25 and annual improvement of $8.7 million compared to Q4’24. Net Income Margin of (70.0%) is up from (131.3%) reported in Q4’24, driven by higher revenue and better gross margins, slightly offset by increase in opex mentioned above.
FY25 gross profit $42.7 million is up $12.8 million compared to FY24. This represents a gross margin of 29.6%, 770 bps of incremental progress compared to 21.9% seen in FY24. The full year improvement is largely driven by increased scale and less power-related disruptions.
FY25 operating loss of ($16.8) million reflects improvement of $16.1 million compared to ($32.9) million operating loss in FY24. This represents an Operating margin of (11.7%) compared to (24.0%) in FY24. Despite the heavy expenditures noted in Q4, margins improved on a full-year basis, indicating operating leverage.
FY25 Net Loss of ($161.0) million continues to expand versus ($74.0) million loss reported in FY24. This represents Net Margins of (112%), down compared to (54.2%) in FY24. Despite the top line growth and improving unit economics, net margins for the full year worsened due to $119 million in non-cash losses tied to debt conversions, warrants, and derivative liabilities.
EPS
Adjusted figures provide a more accurate view of operating performance, showing narrowing core losses, while GAAP EPS was heavily distorted by financing and derivative accounting. Investors should focus on Adjusted EPS, which shows sequential and YoY improvement, while GAAP EPS remains noisy until the financing structure stabilizes.
Q4 GAAP EPS of ($0.12) improved from ($0.28) in Q4’24, reflecting stronger revenue and gross profit at both Jamestown and Ellendale as uptime normalized. On an adjusted basis, EPS narrowed to ($.03), close to breakeven, as higher gross margin partially offset heavier SG&A tied to HPC build-out.
FY25 GAAP EPS of ($0.80) worsened from ($0.65) in FY24 due to $119 million in non-cash charges (debt conversions, warrant issuances, and derivative liabilities). Adjusted EP of ($.06) versus ($0.11) in FY24 highlights meaningful progress in narrowing core losses despite heavy investment and Cloud services volatility.
Cash Flow and Balance Sheet
FY25 was defined by record capital deployment into HPC infrastructure. While Q4 cash burn moderated sequentially, full year OCF and FCF deterioration underscore the scale of investment and reliance on external financing. Liquidity was extended through large capital raises but leverage ballooned. Sustained improvement in OCF and eventual FCF stabilization will hinge on timely energization and monetization of HPC leases.
- Q4 Operating Cash Flow of ($15.7) million, up from ($37.2) million in Q3’24, as working capital normalized. Operating Cash Flow margin improved to (44.3%) versus (101.9%) in Q3.
- Q4 Free Cash Flow of ($79.2) million, improved from ($261.5) million reported in Q3, with FCF margin narrowing to (208.4%) from (716.4%). Sequentially, lower capex spend drove the improvement.
- FY25 Operating Cash Flow of ($115.4) million down significantly from $13.8 million in FY24, with OCF margin falling to (80.0%), down from 10.1% reported in FY24.
- FY25 Free Cash Flow of ($797.0) million, down significantly from ($128.0) million in FY24. FCF Margin of (553.0%), down from (93.7%) in FY24, reflecting the heavy investment cycle for Polaris Forge and HPC facilities.
- Cash of $120.9 million, up from $31.7 million in Q4’24 and up $46.7 million sequentially, was boosted by roughly $875 million in equity and debt financing. As noted by Management, this “does not include the additional $268.9 million in proceeds from our ATM and Series G preferred stock offering that occurred post quarter.”
- Debt of Q4 was $688.2 million, up from $653.3 million in Q3’25 and a significant step up compared to $79.5 million as of Q4’24 (nearly 9x YoY increase).
Conclusion:
Applied Digital asserts they are unique due to being located in the Dakotas where free cooling is available for more than half the year. The company also points toward this region’s surplus of power as a strategic advantage compared to power constrained regions like Texas and North Virginia.
Most importantly, should Applied Digital announce a deal with a hyperscaler, then it will be the first among the miners. Should the deal materialize, it would indicate their operations are attractive on a competitive basis given hyperscalers have a slow, thorough process for site review.
We hold a small allocation in Applied Digital and plan to actively risk manage the position.
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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