Applied Digital's stock is undervalued by 11.8% following the securing of a $5.2B long-term AI lease contract.

Applied Digital (APLD) stock catalyst is a 15-year take-or-pay lease agreement for its Delta Forge 2 AI park, with base contract revenue of approximately $5.2 billion, which also includes renewal options.

See our latest analysis on Applied Digital.

This new lease agreement and a recent $350 million credit facility come as Applied Digital's stock has performed strongly, with a stock price return of 70.91% over the past 90 days and annual shareholder total return exceeding 300%, reflecting strong momentum related to its AI infrastructure development.

If these AI infrastructure stories have caught your attention, consider exploring other data center and compute-focused opportunities using our screening tool for 49 AI infrastructure stocks.

Following this strong run, Applied Digital's recent stock price and promising pipeline of AI lease contract revenue raises a key question for investors: Is this stock still underpriced, or has the market already factored in the next phase of growth?

The most widely followed narrative on Applied Digital points to a closing price of $46.59 versus a fair value of $52.80, with focus entirely on how long-term AI contracts and power access support this valuation gap.

The company recently entered into a long-term (15-year) lease agreement with major AI hyperscaler CoreWeave for its purpose-built AI/HPC data center park Polaris Forge 1, representing a total of $7 billion in contract revenue and multi-year, recurring, and predictable revenue streams that directly support future revenue growth and cash flow stability.

Want to understand what factors are driving Applied Digital's expected fair value higher? The narrative relies on rapid expansion of the top line, sharp improvement in profitability, and assumes investors are willing to pay a premium for these results in terms of future earnings multiples.

Result: Fair value $52.80 (undervalued)

Read the full narrative to understand the logic behind the valuation.

However, Applied Digital's story still hinges on several pressure points, particularly heavy debt financing and dependence on contracts with a few large hyperscalers that could change.

See the key risks for this Applied Digital narrative.

While the most popular narrative on Applied Digital points to an 11.8% fair value gap, the current 1.8x price-to-sales ratio tells a different story. This is significantly higher than the U.S. IT industry's 1.8x, the peer average's 8x, and even the fair ratio's 28.2x. This suggests the market may shift toward lower multiples over time. The tension for investors lies in whether these AI contracts fully justify the significantly above-peer pricing, or whether sentiment has stretched the story too far.

To stress-test whether this higher valuation still aligns with your expectations for Applied Digital, you can walk through our detailed multiple-based breakdown—see what the numbers say—in our valuation breakdown.

Given the mixed excitement and concerns about Applied Digital, this is the time to act quickly, review the fundamentals, and decide your position with 1 key takeaway and 4 important warning signals.

If Applied Digital has caught your attention, don't stop there. Use Simply Wall Street's screening tool to discover more stocks that fit your approach and time horizon.

This article was written by Simply Wall St and is general commentary in nature. We provide commentary using an unbiased approach based solely on historical data and analyst forecasts; this article is not financial advice. It does not constitute a recommendation to buy or sell any stock, nor does it take into account your goals or financial situation. We are committed to providing you with long-term, data-driven analysis focused on fundamentals. Please note that our analysis may not include the latest price-sensitive company announcements or qualitative material. Simply Wall St does not hold a position in any of the stocks mentioned.

Learn through our detailed analysis whether Applied Digital may be undervalued or overvalued, an analysis that includes fair value estimates, potential risks, dividends, insider trading, and its financial condition.

Have feedback on this article? Concerns about the content? Contact us directly. Or send an email to editorial-team@simplywallst.com.

Designs, develops, and operates digital infrastructure solutions serving the high-performance computing (HPC) and artificial intelligence industries across North America.