Very good news for Applied Digital (APLD) stock; but risks remain

The Applied Digital (APLD) stock price has gone parabolic in the past few days, making it one of the best-performing companies in Wall Street. The stock surged to a high of $6.60, its highest point since July 17th and 120% above its lowest point this month. It has also soared by 177% from its lowest level this year. Nvidia invests in APLDApplied Digital shares surged in a high-volume environment. Data by Yahoo Finance shows that the volume on Monday stood at over 52 million, up sharply from the average of 9.38 million. The stock was also among the top-trending names on social media platforms like X and StockTwits.This rally happened after the company raised $160 million in funding, mostly from Nvidia, the most popular name in the semiconductor industry. It also received funds from Related Industries, a leading player in the real estate industry.This investment is notable because of Nvidia’s role in the technology industry, where it manufactures the most advanced GPUs. In the past few years, the company has become the third-biggest firm in the world because of the ongoing AI trend. Nvidia has invested in several AI companies in the past. Most notably, it invested in SoundHound AI earlier this year, pushing its stock to a high of $10.26. Since then, however, the stock has dropped by over 55% to the current $4.50.Applied Digital is growingFor starters, Applied Digital is a technology company that runs data centers. The company initially focused on Bitcoin mining, a high-risk and high-reward industry. It then changed its business strategy in 2022 and exited the mining business altogether.Now, Applied Digital provides data center solutions to companies in the Bitcoin mining industry, who rent out space in its data centers. It now has seven big Bitcoin mining companies as clients who account for about 83% of its total revenue.Applied Digital has also moved to the cloud computing industry. Launched in 2023, the division provides cloud services to companies, including AI and machine learning developers. It does that by providing GPU computing solutions to help them handle big workloads. It has over 6,200 GPUs mostly from Nvidia. This is a big industry that is expected to keep growing as demand for AI solutions continues rising. It also provides HPC Hosting solutions, where it is building AI data centers. Strong quarterly resultsThe most recent financial results showed that Applied Digital had mixed financial results. It made over $43.7 million in revenues, higher the $8.5 million it made in full-year 2022.Its net loss was over $64.8 million while its adjusted EBITDA came in at $4.8 million. The highlight for the quarter was its infrastructure upgrades as it continues to grow its business. It also resolved transformer issues at its Ellendale Data Center Hosting facility and restored it to full capacity.For the year, Applied Digital made over $165.6 million, a big increase from the $55.5 million it made in 2023. As expected, the company had a big net loss of $149 million.Analysts are optimistic about Applied Digital’s growth. The average estimate is that its revenue will come in at $53.8 million in the fiscal first quarter over $259 million in 2025 and $402 million in the following year. This shows that the company’s growth is set to accelerate. Analysts have a positive outlook for the company, with those at Needham, Roth MKM, B. Riley Securities, and HC Wainwright have a buy rating. The analysts have an average target of $9, much higher than the current level of $6.58.Still, there are risks for investing in Applied Digital. First, the company depends on just a handful of customers in the Bitcoin mining industry. This means that the loss of just one of them could lead to substantial losses.Second, Nvidia’s investment is not a guarantee that it will do well in the future. A good example of this is SoundHound, whose stock has not done well since Nvidia invested in it a few months ago.Third, the AI industry may become cyclical as we saw with other industries like electric vehicles, cannabis, and 3D printing.Applied Digital stock price analysisThe daily chart shows that the APLD stock price bottomed at $2.37 in May and has now soared by over 178% to its highest point since July. It has jumped above the 50-day and 200-day Exponential Moving Averages (EMA), pointing to more institutional and retail demand. The stock has also jumped above the upper side of the ascending channel and is nearing the crucial resistance point at $7.22, its highest point in June. Also, the Relative Strength Index (RSI) has pointed upwards and is nearing the overbought point.Therefore, I suspect that the stock will rise to $7.22 and then resume the downward trend as the Nvidia news start to fade.The post Very good news for Applied Digital (APLD) stock; but risks remain appeared first on Invezz