Applied Digital Corp. 10-Kyear ended 2026-05-31

Executive Summary

Applied Digital’s AI data-center strategy began generating revenue in FY2026, but growth was dominated by tenant fit-out services rather than recurring rent. Revenue increased 167% to $611M, while operating losses widened as stock-based compensation surged and construction spending substantially exceeded operating cash generation. Year-end contracted capacity of 1.2 GW, followed by a 210 MW lease after year-end, provides substantial demand visibility—but delivering that capacity requires continued construction, power access and financing. For common shareholders, the investment thesis depends on converting contracted demand into recurring cash earnings sufficient to support expensive senior capital without persistent dilution.

Key Financial Highlights

FY2026 ended 5/31/2026; balance-sheet figures are at that date.

• Revenue quality: HPC contributed $385M, or 63% of revenue; $271M was principally tenant fit-out services, versus $115M of rental and other revenue. Recurring rental growth is the more important durability test.
• Earnings quality: positive OCF despite consolidated losses reflected noncash compensation and interest, deferred revenue and other movements. Earnings also included $75.8M of derivative gains, $10.8M of investment gains and a $59.7M cloud-business classification loss.
• Dilution: common shares outstanding increased 28% to 288M; consolidated stock-based compensation reached $225M vs $22.5M. Weighted-average share growth helped loss per share improve despite a larger loss attributable to common stockholders.
• Liquidity and senior claims: cash and equivalents were $1.59B, while substantial additional cash was restricted. Scheduled debt principal was $5.31B; estimated FY2027 interest payments were $378M. TopCo 2 preferred capital carries a 12.75% dividend rate, potentially rising to 16.75%, and a minimum 1.80x liquidation preference.

Business Developments

• Campus expansion: year-end leases covered 1.2 GW; the subsequent Delta Forge 2 agreement added 210 MW and ≈$5.2B of base-term contracted revenue. Management describes the broader five-campus portfolio as ≈$36.2B over initial 15-year terms; delivery, not contract signing, determines revenue realization.
• Operating transition: Polaris Forge 1’s first 100 MW facility opened in 10/2025. Management expects Polaris Forge 2 at full capacity in early 2027, with later campuses following through the first half of 2028.
• Power-led strategy: standardized liquid-cooled facilities and the Base Electron partnership’s ≈1.2 GW natural-gas generation initiative seek to address power availability, management’s principal expansion constraint.
• Cloud separation: the 5/5/2026 ChronoScale transaction left APLD owning ≈97%, so consolidation continues; the transaction generated $54.5M of goodwill rather than removing cloud-related financial exposure.

Risk Assessment

• Construction and energization: permitting, utility interconnections, equipment shortages and cost inflation could delay lease commencement or trigger customer remedies across the campus buildout.
• Financing and senior economics: $4.19B of scheduled principal falls due in FY2031, while secured debt and preferred claims raise the cash generation required before common shareholders benefit.
• Customer concentration: two customers represented 59% and 25% of revenue; the sole blockchain-hosting customer has ≈1.5 years remaining, creating renewal and replacement exposure.
• Power and supply dependence: electricity availability and pricing, single-source equipment and third-party contractors can impair both delivery schedules and operating margins.
• AI demand and obsolescence: customer self-builds, more efficient models or changing cooling and density requirements could weaken demand or require additional investment.
• Valuation and consolidation: Level 3 instruments create earnings volatility, while retained ChronoScale ownership preserves operating, liquidity and reporting exposure.

Strategic Outlook and Investor Actionables

Management is betting that long-duration leases, repeatable construction and power access will turn development spending into durable rental earnings. The opportunity is contracted AI infrastructure demand; the threat is that delays, financing costs and senior claims consume the economics before common shareholders benefit.

• Delivery conversion: starting from ≈100 MW operating and revenue-generating, track campus openings against management’s schedules. Timely commissioning supports the thesis; delayed lease commencement undermines it.
• Recurring revenue: HPC rental and other revenue starts at $115M, versus $271M of fit-out services. Growing rent and segment profit would demonstrate maturation; continued dependence on fit-outs would not.
• Power execution: the Base Electron note receivable was $58.6M. Watch whether funding produces usable generation and energized campuses, rather than rising advances without delivery.
• Common-share economics: FCF was $(2.95)B and shares outstanding rose 28%. Improving cash coverage as campuses open would validate financing-led growth; continuing funding gaps and dilution would weaken shareholder returns.