Summary Applied Digital recently announced an agreement with its first AI cloud services customer. The agreement could amount to $180 million in revenue over the next 24 months. On the same day, the company disclosed a prospectus that has executives and insiders registering shares for sale. The following day Applied Digital disclosed a $175,000,000 mixed shelf offering. On May 16th, Applied Digital (APLD) announced an agreement with what it says will be the company's first Artificial Intelligence cloud computing customer: through its wholly-owned subsidiary Sai Computing, has secured its first major AI customer with an agreement worth up to $180 million over a 24-month period The announcement, which came pre-market on the 16th, mentioned a possibility of $180 million in revenue over a 24-month period from the agreement. In the release, CEO Wes Cummins mentioned that this is just the "tip of the iceberg:" With a surge in demand for high-performance compute power to support the growing AI industry, we are excited to be at the forefront of this transformation. This partnership not only reaffirms our commitment to advancing emerging technology applications but also solidifies our position as a key player in the digital infrastructure landscape Applied's release said the revenue includes a significant prepayment with service beginning in June. What was notably not in the press release was any mention of a baseline revenue estimate or an estimate of how much of the $180 million will be realized before the end of 2023. Applied Digital's Stock Rally Given the massive jump in sales this would represent for a company with just $41 million in twelve month trailing revenue, the stock price responded very favorably to the news and is now up 320% year to date. Much of that appreciation has come in just a few sessions: Data by YCharts On the 16th, APLD shares closed 79% higher on the session and did so on nearly 80 times the volume from the previous day. There was a continuation on the 17th with APLD shares moving up another 15% on the follow up session. However, the 15% gain came on about 34% of the volume from the May 16th rally. On one hand, it's easy to make the case that this rally is warranted due to the potential revenue increase. Artificial Intelligence Search Interest (Google Trends) On the other hand, there's a lot of interest in Artificial Intelligence, or AI, at the moment and any company that theoretically benefits from growth in that space figures to benefit from speculative stock buyer interest. Speculative buying interest appears to be the main driver of the immediate response to the company's AI revenue announcement. However, I suspect this rally could be somewhat short lived. Share Registration Applied Digital's AI revenue press release before the market opening wasn't the only release from the company on May 16th. After hours the company disclosed two separate prospectus filings that individually detailed the registration of 13,500,213 and 41,224,531 shares of the company's common stock for stockholder selling. The two combined shareholder registrations amount to 54,724,744 common shares. These sale registrations represent 57% of the 95,908,964 outstanding APLD common shares. Name of Selling Stockholder Shares Beneficially Owned Registered Shares B. Riley Securities, Inc. 613,163 155,000 PFSI Custodian FBO Carla Cummins IRA Account 423,833 423,833 Cummins Family Ltd. Partnership 17,590,238 17,590,238 Wesley Cummins 23,300,868 21,196,849 Wesley Cummins IRA Account 742,166 742,166 Neal Fine 149,523 149,523 Source: Applied Digital prospectus There are dozens of shareholders that are registering stock for selling but the most noteworthy is CEO Wes Cummins. Through various accounts, Cummins collectively owns approximately 42 million shares that amount to almost 44% of the company's outstanding common stock. It should be noted that there is no guarantee that any or all of these shares will ultimately be sold. But if all of the shares that have been registered are indeed sold, it would result in Cummins owning just 2.1 million APLD shares. Now for full disclosure, Cummins did purchase another 10,000 APLD shares on May 17th at $6.17 per share. But the main story here is the overwhelming majority of his stock is now registered to be sold. He's not the only one either. Co-founder Jason Zhang registered all 3,256,426 of his shares. CFO David Rench and CMO Regina Ingel also registered the majority of their shares. Though their positions are much smaller than Zhang's. Shelf Offering On May 17th, Applied Digital disclosed a $175 million mixed shelf offering that may include the sales of common stock, preferred stock, and/or warrants. Beyond that, details are limited and will be provided in future disclosures: Common Stock, par value $0.001per share (the "Common Stock") To be set forth in a prospectus supplement Preferred Stock, par value $0.001 (the "Preferred Stock") To be set forth in a prospectus supplement Warrants To be set forth in a prospectus supplement Total $175,000,000 Source: Applied Digital The company says the proceeds from the offering will be used to fund working capital needs. Evidently, the previously mentioned revenue from the company's first AI customer isn't going to be lucrative enough or immediate enough to fund growth without shareholder dilution. Valuation Anyone following this ticker or my work likely knows Applied Digital is a company that I've covered several times. In my first article covering APLD for Seeking Alpha, valuation was a concern of mine. My biggest concern at this point is the share registration. Regardless of those share sales, the stock is overvalued again. Annualized Sales $146,400,000 Shares 95,908,964 Sales per share $1.52 Share price $7.05 Price to sales 4.62 Source: Author's estimates and calculations If we assume Applied Digital's annualized revenue includes an even distribution of the $180 million from the AI service agreement, we get $90 million in annualized revenue from that customer. And again, this assumes perfection pertaining to that agreement. The reality is we don't really know how much revenue that deal will actually provide Applied Digital over the next 24 months. It could be much less than $180 million. The remaining $56 million in that revenue estimate comes from annualizing the $14.1 million in pre-existing revenue from the prior quarter. At nearly 5 times sales, APLD certainly isn't cheap. Summary I sold some of my APLD shares following the AI revenue announcement on May 16th and then I sold a little bit more after seeing the prospectus and the shelf offering disclosures. I haven't sold it all. I'm still long APLD shares. But I suspect we're going to see a reversion back to previous share price levels and it could happen fairly quickly. APLD has benefited from momentum traders chasing the artificial intelligence narrative. Beyond that, the company's executives and insiders could be preparing to sell the rip. We're all likely familiar with the idea of following the leader. That kind of thinking is what ultimately pushed me to go long APLD shares back in March given what appeared to be high conviction buying from Wes Cummins. But now it looks like the leader could possibly be preparing to take some profit. It might be wise for you to do the same.
