Is Applied Digital (Blockchain) a buy?

by Arthur · December 6, 2022

Applied Digital Corporation (NASDAQ: APLD ) stock is down 92% YTD as investors grow wary of the crypto space. So, are blockchain and crypto mining stocks doomed, or is this the perfect time to buy the dip? Read on for some analysis of the APLD share.

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What is Applied Digital (Applied Blockchain)?

Applied Digital, which recently changed its name from Applied Blockchain, Inc., designs, develops and operates next-generation data centers across North America. The company provides digital infrastructure solutions to the rapidly growing high-performance computing (HPC) industry.

High-profile crypto companies that Applied Digital counts as clients include Bitmain, F2Pool, Marathon (NASDAQ: MARA), and GMR.

The company went public via IPO in April 2022, at $5, with a floating share of nine million shares. Today, Applied Digital Corp has 97.4 million shares outstanding and a share price of $1.94.

Distressed Crypto Assets Fund

Applied Digital Corp recently launched an independent fund aimed at acquiring distressed cryptocurrency assets. The fund and its assets, which may include mining hardware and digital infrastructure assets, will be jointly managed by a newly created entity, Highland Digital, a 50/50 joint venture between Applied Digital and GMR (a customer of Applied Digital).

The independent fund aims to raise capital of up to $100 million from external investors.

Applied Digital Chairman and CEO Wes Cummins said:

The creation of this fund and associated joint venture again demonstrates our creativity and strong industry relationships that position us to capitalize on this volatile market,

We have proven ourselves as a leading next-generation data center operator and hosting partner and look forward to deepening our partnership with GMR to take advantage of the opportunities we see on a weekly basis.

Cummins believes that any successful acquisition of Highland Digital could create opportunities for Applied Digital to expand its hosting customer base. Applied Digital does not plan to issue equity to raise capital for the fund.

Furthermore, APLD’s infrastructure knowledge and GMR’s deep experience in managing mining hardware through cryptocurrency market cycles present a promising combination. This can actually ensure that they are in an excellent position to take advantage of the current emergency environment.

APLD share economy

Applied Digital will report its next quarterly update in February 2023. The FactSet analyst consensus is expecting EPS of -$0.07 and sales of $12M.

The company has a forward P/E of 5.5 (what is a P/E ratio?) and a P/BV of 2.6.

Sales in fiscal year 2022 exceeded $8.5 million. In Q3 2023, sales exceeded $6.9 million, and FactSet estimates for full 2023 come in at around $105.3 million. However, the company will not provide sales guidance for the next two quarters as it is unclear when it will put energy on its new facilities.

APLD stock growth potential and investment risk

Any stock related to the crypto market seems inherently risky as the industry falls out of favor. However, APLD has three things going for it. It doesn’t mine crypto directly, it’s focused on a diversified customer base, and its digital infrastructure is used by big industry names.

Next-generation data centers have widespread appeal as technology companies vie for high speeds and security. Therefore, the company’s digital infrastructure solutions are likely to appeal to the rapidly growing HPC industry.

Cryptocurrency-related stocks are extremely volatile and may be affected by external factors such as financial, regulatory or geopolitical events. In fact, macroeconomic conditions suggest that we are sliding into a Bitcoin winter.

Still, when one company goes bankrupt, the remaining competitors can bid on distressed assets. This is something Applied Digital has an eye on and is always looking for more sites with a good power supply.

As the industry enters a period of stress, Applied Digital is exposed to counterparty risk through its affiliations with its clients, including Bitmain and Marathon. Bitmain operates from its North Dakota site, as do F2Pool and GMR.

In its latest earnings call, Cummins stated that Marathon is one of the best counterparts, if not the best, of the listed miners in the industry. That’s because it has a relatively clean balance sheet and no impending debt repayments.

Applied Digital buys power and leases its HPC applications and hosting services to customers. It is building a 500MW facility for Bitcoin mining, while also aiming to attract HPC customers to diversify its customer base and maintain cash flow. It also hopes to scale its GPU-based machine learning application in the next year or two.

Although Applied Digital currently has no available capacity to offer, it is actively seeking capacity from other customers to better serve the industry. Furthermore, it is focused on providing ultra-low-cost digital infrastructure for its HPC offerings.

Is APLD a good investment?

Stocks operating in the crypto landscape are inherently linked to the price of Bitcoin. Therefore, when the Bitcoin price falls, the APLD stock price is likely to fall as well, and vice versa when the price of Bitcoin rises.

Applied Digital is a risky stock, but one that makes money and has a bit of a buffer against the volatility of the crypto industry. It could also potentially benefit from increased demand for hosting amid limited supply.

Used Blockchain in London

There is another company called Applied Blockchain, which may cause confusion. London-based Applied Blockchain is led by founder Adi Ben Ari. This Used blockchain is a Web 3.0 development company that builds blockchain solutions to bridge Web 2.0 (where we are now) and Web 3.0 (where we want to be).

The fundamental attraction of blockchain technology is that it can bring technical efficiency in a decentralized manner that provides trust and security. This is what attracts people to blockchain technology and is why there are still many blockchain enthusiasts despite the controversies surrounding Bitcoin and the recent collapse of FTX.

Applied Blockchain claims to build the necessary technology that will bridge this gap and enable a bright future for blockchain adoption.

It has a team of 100 developers, mainly based in London, with a presence in Portugal. Their customers are based all over the world and several are in the US. Applied Digital recently worked with Ledger to implement Ethereum into the Ledger product. APMD has also worked with some well-known traditional companies, including Intel, Shell, Vodafone, Lloyd’s Register and the United Nations.