AI Stock Comparison: Applied Digital versus Lumen Technologies
Hopping onto the AI Wagon: A Look at Applied Digital (APLD) and Lumen Technologies (LUMN)
In the realm of artificial intelligence (AI) investing, two companies stand out: Applied Digital and Lumen Technologies. Applied Digital specializes in building and renting out data centers tailored for AI services and high-performance computing (HPC) applications that crave computational power. Lumen Technologies, formerly CenturyLink, assists tech titans such as Microsoft in upgrading their AI-centric data centers.
Over the past year, both stocks have experienced considerable growth — Applied Digital skyrocketed over 80%, and Lumen surged a staggering 190%. Let's delve into why these tech-driven companies have caught the attention of investors, and discuss whether you should dive into these high-flying stocks.
Applied Digital: Rapid Expansion
Applied Digital constructs and purchases sprawling data centers, ensures they are powered appropriately, and then rents out the space to companies that install their own servers. In late 2022, the business pivoted toward HPC, AI, and machine-learning companies. In 2023, it introduced a subsidiary, Sai Computing, dedicated exclusively to serving AI-oriented cloud service providers.
In fiscal 2023 (which concluded in May 2023), Applied Digital's revenue soared an astounding 548% to $55 million as it expanded its AI-focused data center business. In fiscal 2024, revenue escalated another 199% to $166 million as the AI boom continued. Analysts predict a 55% revenue growth to $256 million in fiscal 2025.
While the company's rapid growth is impressive, it remains deeply unprofitable. With an enterprise value of $1.75 billion, however, it doesn't appear excessively overvalued at 7 times this year's sales. Moreover, company insiders have bought nearly twice as many shares as they've sold over the past year, signaling potential upside.
Applied Digital's debt-to-equity ratio stands at a manageable 1.1, but investors should keep a close eye on ongoing dilution. Over the previous two years, the company has increased its share count by 136% to cover secondary offerings and stock-based compensation expenses.
Lumen: Reinventing its Identity
As one of the largest telecom companies in the U.S., Lumen has long shied away from the wireless market. Instead, it has invested in expanding its wireline networks, aiming for stable returns from the slower-growing sector. It also bulked up its fiber networks while bundling cloud, security, and collaboration tools into its business wireline plans.
However, Lumen's smaller business couldn't counteract the softness in its business wireline segment, causing revenue to dip for six consecutive years. It's also unprofitable, and its debt-to-equity ratio sits at an alarming 71.2 at the end of 2024.
These challenges caused Lumen's stock to plummet below $1 last June. But in the subsequent months, its stock rallied after tech titans like Microsoft and others enlisted Lumen to upgrade their AI and cloud data center infrastructure, with fiber optic cables in tow. The cumulative value of these deals reached $8.5 billion by the end of 2024.
While analysts anticipate a 6% revenue decline to $12.4 billion in 2025, Lumen's enterprise value of $20.4 billion suggests it could be undervalued at less than 2 times this year's sales, provided its AI-focused deals reanimate its ailing business in the coming years. Additionally, the company's number of outstanding shares remained steady over the past two years, and insiders have bought five times as many shares as they've sold over the last 12 months.
The Better AI Bet: Applied Digital
Applied Digital seems riskier than Lumen, but it's growing exponentially and has direct exposure to the AI market. Lumen's AI deals could alleviate other challenges, but it needs to escalate its spending to cater to those big customers. Lumen's high debt levels could also restrict its upside potential if interest rates stay elevated. In conclusion, while both stocks hold weaknesses, Applied Digital appears to remain the better AI play this year.
- Applied Digital, with its focus on AI-centric data centers, has seen a significant revenue growth of 548% in fiscal 2023, reaching $55 million, and a further 199% in fiscal 2024, reaching $166 million.
- Analysts predict a 55% revenue growth for Applied Digital in fiscal 2025, amidst the company's remains unprofitable status and high debt-to-equity ratio of 1.1.
- On the contrary, Lumen Technologies' revenue dipped for six consecutive years, despite its investments in expanding wireline networks and bundling cloud, security, and collaboration tools.
- However, Lumen's stock rallied after tech titans like Microsoft enlisted Lumen to upgrade their AI and cloud data center infrastructure, resulting in cumulative deals worth $8.5 billion by the end of 2024, and an enterprise value of $20.4 billion, suggesting it could be undervalued.
