What a brutal six months it’s been for Applied Digital. The stock has dropped 26.6% and now trades at $5.90, rattling many shareholders. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Applied Digital, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free .

Even with the cheaper entry price, we're cautious about Applied Digital. Here are three reasons why you should be careful with APLD and a stock we'd rather own.

Why Is Applied Digital Not Exciting?

Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ:APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.

1. EPS Trending Down

We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Applied Digital’s earnings losses deepened over the last two years as its EPS dropped 108% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Applied Digital’s demanding reinvestments have drained its resources over the last four years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 171%, meaning it lit $171.40 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Applied Digital burned through $445.2 million of cash over the last year, and its $799.4 million of debt exceeds the $286.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Applied Digital’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.