Wells Fargo: Applied Digital Leases Worth $36B

Wells Fargo initiated coverage on Applied Digital Corporation (NASDAQ:APLD) on September 17, assigning an Overweight rating and a $50 price target. Analyst Eric Luebchow identified the company as a Top Idea, noting that its existing signed leases, not anticipated future demand, form the basis of this valuation. Applied Digital constructs and leases data centers to AI companies, currently holding contracts for approximately 1.4 gigawatts of capacity.

The base value of these signed leases is estimated at $36 billion, with potential renewals extending beyond $86 billion over three decades. Over 70% of this contracted capacity is with major clients Meta and Oracle. Wells Fargo's valuation model places the net present value of existing leases at about $30 per share, surpassing the stock's pre-call closing price of $24.39. This suggests the unbuilt pipeline is valued at nearly zero by the analyst.

These leases are structured as take-or-pay agreements, ensuring payment from creditworthy tenants regardless of capacity usage. The company's "power-advantaged" footprint is also a significant asset, as securing utility allocations and grid connections, which can take years, is presented as the scarce input in AI data center development, rather than capital. This early grid access reduces regulatory risk compared to competitors.

However, the article notes that the contracted capacity is not yet built, and the funding for construction comes from external sources, including a facility of up to $5 billion in preferred equity from Macquarie Asset Management. Take-or-pay leases fix revenue but leave cost overruns to the developer, and delayed construction incurs financing costs without generating income. Tenant concentration, primarily with Meta, Oracle, and CoreWeave, also presents a risk, although the CoreWeave lease has Meta credit support.