Applied Digital has gotten torched over the last six months - since October 2024, its stock price has dropped 36.8% to $4.49 per share. This might have investors contemplating their next move.

Is now the time to buy Applied Digital, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free .

Even with the cheaper entry price, we don't have much confidence in Applied Digital. Here are three reasons why we avoid 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

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

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

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

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.