As companies ramp up their use of AI and high-performance cloud computing, demand for large-scale data centers is surging.
According to market research firm Technavio, the data center market is projected to expand by $535.6 billion over the next four years, but tapping into that growth won’t be easy.
The industry is fiercely competitive, dominated by tech heavyweights like Google, Amazon, Microsoft, IBM, and Cisco.
That makes it an uphill battle for newcomers like Applied Digital Corporation (APLD) — a company that until recently was focused on cryptocurrency mining infrastructure.
Now, Applied Digital is pivoting — building and managing data centers for high-performance computing (HPC), a move that’s catching investor attention.
APLD has soared nearly 51% over the past year as it shifts deeper into HPC. Institutional investors are especially bullish.
Last quarter, VanEck Associates more than doubled its stake, increasing it 113.8% to $12.97 million. Geode Capital Management boosted its position 48.7% to $38.2 million, while State Street raised its holdings 14% to 1 million shares ($7.64 million).
The company’s latest earnings back up the optimism with revenue increasing 51% year over year to $63.9 million. The company posted a net loss of $0.06 per share, beating Wall Street’s expected loss of $0.14.
Despite the growth, APLD is still down 15.1% year-to-date — a sign that investors are watching closely to see if the company can hold its own against the industry’s biggest players.
If you build it, will they come?
Applied Digital is currently building a 100 MW data center in Ellendale, North Dakota. The 342,000-square-foot building will provide “highly efficient” liquid-cooled infrastructure for HPC applications.
By building its data center in North Dakota, Applied Digital is seeking to carve out a competitive advantage by offering clients a lower-cost infrastructure.
North Dakota has the lowest electricity cost per kWh in the U.S.
Applied Digital has lined up some big financial backers as it enters the space, including Nvidia which has a 3% stake in the company.
It also announced in January that it had partnered with Macquarie Asset Management, which could provide Applied Digital with up to $5 billion in financing.
The focus of its business strategy is to lease out its North Dakota facility to hyperscalers, who are the primary customers for data centers.
Applied Digital is still trying to land its first client.
CEO Wes Cummins acknowledged in an earnings call in January that the negotiating process with potential clients “has been long” because the due diligence process on their end is extensive.
“We're a new entrant, we're a first-time supplier to any of these hyperscalers,” he said.
But the “financial backing from a very well-known partner with a lot of capital” like Macquarie should give the company credibility, he added.
Demand is outweighing supply
The current supply of data center capacity does not meet the potential “exploding demand” for data center capacity that’s coming, according to a report by McKinsey & Company.
McKinsey analysts estimate that the global demand for data center capacity could rise at an annual rate of between 19% and 22% from 2023 to 2030, reaching an annual demand of 171 to 219 gigawatts (GW).
The data center supply deficit could be more than 15 GW in the U.S. alone by 2030, the report states.
Perhaps the biggest question facing Applied Digital is whether it can build enough brand awareness to compete with the bigger names in the space.
Not everyone is convinced.
Analyst Stephen Ayers wrote on Seeking Alpha that Applied Digital is a "small fish swimming among giants' and that its valuation hinges on 'succeeding without any obvious technological advantages in a highly competitive market."
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