My previous coverage of Applied Digital (NASDAQ:APLD) for Seeking Alpha focused mainly on what, I felt, was a growing list of concerns for the company. Among them, depleting cash reserves, asset sales, equipment issues, and questions about the true demand from the market for HPC services. This is what I said in April:

Occam’s Razor would suggest the demand for HPC compute might not actually be as strong as what’s believed by the broader equity market.

We’ll revisit this speculation in a moment. Today, we have a very different story from the cash reserves standpoint. But before we get there, a brief look at recently announced earnings.

FQ4 2024 Earnings

For the quarter ended May, Applied Digital reported $43.7 million in total revenue. This was a modest 1% sequential gain over the quarter ended February but a near doubling year over year. Expenses came down slightly to $46.3 million:

While cost of goods sold did come down by nearly $1 million from the prior quarter, fiscal Q4-24 was the second consecutive quarter of negative gross margin for Applied Digital. Factoring in 24% QoQ growth in SG&A up to $34.8 million, operating income in the quarter came in deeply negative.

Adding to the red, interest expense in the quarter came in at $18 million and the company reported a total quarterly net income of almost -$65 million. The quarter ended May was the second consecutive quarter with a net loss figure eclipsing $62 million. This is obviously unsustainable and explains many of the cash infusion moves we’ve seen in recent weeks.

At the end of May, the company had a little over $3.3 million in cash and equivalents. Thus, the clear need to raise capital. Subsequent to Applied Digital’s quarterly earnings release, we’ve seen two such instances of large capital raises. One of which made headlines that took the stock on a massive intraday rally September 5th, 2024.

Raising Capital

In the last week alone, Applied Digital has raised $210 million in fresh capital. On August 30th, Applied Digital announced the issuance of $53.2 million in convertible preferred shares that resulted in $50 million in net proceeds to the company. Those shares pay 8% in-kind or cash and are convertible to common shares at $7 per. The conversion price would be a 53% premium to the current share price of $4.57.

Personally, I view it as more likely the convertible preferred shares will be held primarily for the income rather than for share conversion – which would be nearly $4.3 million in annual interest payments from Applied Digital. I take that view because I don’t think APLD shares are going to revisit $7 anytime soon. But again, this is assuming the stock doesn’t rip above conversion price, and it’s possible that I’m wrong. Applied Digital plans to use the proceeds from this preferred share placement to “fund various growth initiatives across its business segments.”

Just a few days after announcing the preferred share capital raise, investors received even bigger news as Applied Digital announced a definitive agreement to raise $160 million via private placement with a group of investors that includes NVIDIA (NVDA). APLD stock rallied roughly 75% intraday following the news of the deal. Again, this capital will be used to help Applied Digital grow its AI/HPC business line. Per the press release, Applied Digital will be issuing 49.4 million new shares at an average share price of $3.24.

Risks

Frankly, I think this NVIDIA deal is interesting, but probably not for the same reason as the rest of the market. Many are likely looking at this capital raise with NVIDIA’s involvement as a stamp of approval from the top AI company on the planet. I see it a bit differently. We’ve seen NVIDIA engage in vendor financing in the past through companies like CoreWeave. Which is to say, NVIDIA invests in its customers and its customers then buy chips from NVIDIA. It’s not against the law, but it does raise concern about just how much demand there truly is for these products if NVIDIA is funding its own customers to move chips.

Now, for full disclosure, I’m synthetically short NVDA via the Tradr 1.5X Short NVDA Daily ETF (NVDS) and the company’s funding of Applied Digital hasn’t swayed me even slightly. I suspect much of the capex on AI has gotten ahead of itself and I view it as very possible companies like Applied Digital may struggle to generate AI/HPC business as a result of that overspend. This should not be a surprise to those of you who have been reading my APLD work through the years, as I expressed similar concern in an article from June of last year.

All this said, I do believe there is a very robust, very profitable future for AI and the infrastructure businesses that help produce such applications. The question for APLD investors is how much dilution palatable, assuming Applied Digital is indeed one of the future AI/HPC success stories? At the end of May, there were 157.4 million common shares outstanding. That figure will be well over 200 million as a result of the NVIDIA/Related Companies capital raise. And in June, authorized shares grew to 300 million. Given the company’s $150 million net loss in fiscal 2024, I suspect dilution of APLD not yet over even after raising $210 million over the last week.

Closing Summary

In my last article, I said I wouldn’t pay much more than tangible book value for APLD shares. That may have been a bit frugal, as the market clearly disagrees. At slightly over $4.50, APLD shares are trading at nearly 6x tangible book. I still think that’s too expensive for a company that continues to dilute via capital raise because of quarterly cash burn that is moving in the wrong direction. Despite my concerns about dilution, delays, and an AI sector that, I feel, is dramatically overhyped, if the underlying business improves for Applied Digital, I would entertain a long position again. But I can’t get there yet.