JP Morgan breaks down Applied (APLD.US): AI computing power business advances rapidly, tens of billions in financing faces a reality check.

Title context: JP Morgan breaks down Applied (APLD.US): AI computing power business advances rapidly, tens of billions in financing faces a reality check. Text: Data center operator Applied Digital (APLD.US) recently reported better-than-expected quarterly results, but the market reaction was muted. This AI computing power company, deeply rooted in North Dakota, is advancing its existing projects smoothly overall, but with nearly $10 billion in projects awaiting construction, a tightening financing environment has become a major challenge facing the company. JP Morgan's credit research team released a report providing a comprehensive breakdown of the company's operations, project progress, financing pressure, and risks. Quarterly results beat expectations, business heavily tilted toward high-performance computing Data shows that in the first quarter of fiscal year 2027 (ended August 2026), Applied Digital generated revenue of $342 million, while market expectations were only $124 million; EBITDA was $64 million, above market expectations of $43 million, with core financial metrics significantly outperforming market estimates. In terms of business structure, the company's operations are increasingly concentrated in high-performance computing (HPC), with the high-performance computing business already accounting for approximately 77% of total revenue. Projects under construction steadily coming online, over 600MW IT computing capacity planned for operation in the next 12 months The company's key project construction progress is broadly in line with plans: the APLD project has achieved full operation; the two major projects PFORGE and ELNFOR are also advancing as planned. According to the company's plans, more than 600MW IT of computing capacity will be put into operation within the next 12 months, including 200MW IT for the PFORGE project, 150MW IT for the ELNFOR project, and the remaining 250MW IT from three sites that have not yet completed debt financing. Among these, the ELNFOR project has variables worth continuing to track: the company has signed a memorandum of understanding that if a subsidiary of CoreWeave (CRWV.US) obtains an investment-grade (IG) credit rating, the ELN-04 lease agreement will be transferred to that subsidiary. The premise of this arrangement is that CoreWeave provides GPU equipment financing for the ELNFOR data center, but this financing matter has not yet been finalized this quarter. If the transaction is completed and ELNFOR can be completed on schedule in the second half of 2027, the bond spreads of the APLD and ELNFOR projects are expected to converge; the current spread between the two is 64 basis points. North Dakota's friendly regulatory environment makes it a "safe haven" for computing power construction Compared with traditional data center hubs such as Texas and Virginia, Applied Digital's home base of North Dakota currently faces almost no regulatory resistance against data centers. Management stated that the state has already developed a mature and clear data center approval framework, allowing companies to clearly anticipate process requirements when carrying out projects; at the same time, projects do not have to get stuck in grid interconnection queues like the Batch Zero project in Texas. Of course, regulatory policy may still change in the future, but the company judges that North Dakota will remain highly attractive in 2027-2028. Moreover, as regulatory scrutiny of data center development tightens across the United States, the company believes that the value of its already-built, energized, and operational campus assets has actually increased, which is conducive to subsequent lease renewals and also enhances the terminal value of existing assets. Increasing local power security, expanding into the Finnish market overseas To match the power demand of computing capacity expansion, Applied Digital signed a long-term power purchase agreement (PPA) in October with independent power producer Base Electron (Applied holds a 10% stake), and will build a 1.2GW natural gas power generation facility in North Dakota, expected to begin supplying power in 2030. The facility is intended to provide dedicated power generation capacity for the Polaris Forge 3D campus expansion project. Currently, the company expects to have 3.5 to 4 GW of power generation capacity by the end of 2030. While deepening its presence in the United States, the company has taken its first step toward internationalization: this quarter it reached an agreement with the Finnish side and is expected to obtain up to 1GW of power capacity. Under the agreement, the company plans to build a large AI campus and is in talks with hyperscale customers. The first 100 MW of power at the campus will be put into operation in 2028. Massive contracted pipeline faces obstacles to implementation, nearly $10 billion in projects urgently need financing Although the company has a rich backlog of orders, since the release of its previous earnings report in July 2026, the company has not announced any new business contracts. Currently, the company has signed three new cross-state business contracts, with a total contract value of $20 billion. The projects are Delta Forge1 in Louisiana, Delta Forge2 in Alabama, and Polaris Forge3 in North Dakota. JP Morgan speculates that the tenant is Meta. Based on the midpoint estimate of capital expenditure per MW of computing capacity, the total construction cost of these three projects that have not yet obtained financing is close to $9.7 billion. If calculated at an 80% loan-to-cost (LTC) ratio, approximately $7.8 billion in debt funding needs to be secured. Media reported in September that a bank is assessing investor interest in a $3.5 billion transaction to fund the data center project Applied Digital is building for Meta. Although the report did not mention specific financing arrangements, JP Morgan speculates that Applied needs to begin raising funds for its nearly $10 billion in project costs as soon as possible in order to fulfill its commitments to Meta. Management said on the earnings call that these three projects use the same financing plan (i.e., preferred equity plus project-level debt financing), and have already "engaged in active negotiations with major Financial Institutions, Inc." Management also mentioned that the company is considering options beyond high-yield bonds, including exploring innovative solutions in the investment-grade market, such as tools backed by tenant guarantees. Why has the financing environment become difficult? Externally, thin market trading in August combined with overall high interest rates suppressed primary market issuance enthusiasm. At the industry level, the weight of the high-performance computing sector in JP Morgan's high-yield bond index climbed from 1.07% to 3.55%, significantly increasing investors' exposure to the sector and making them more cautious about new supply. The company plans, after the leases formally take effect and construction risks are eliminated, to refinance the existing higher-cost high-yield project bonds through asset-backed securities (ABS) or the investment-grade market. The APLD project has already been put into operation, and its coupon rate is relatively high, making it theoretically suitable for replacement. However, JP Morgan points out that the company still has a large amount of new debt to bring to market, so debt replacement is not a priority task at this stage. Bond rating adjustments: some project bonds downgraded to "Neutral" The report points out that in an environment where data centers generally face regulatory resistance, supply chain tensions, and financing bottlenecks, although Applied Digital's operations this quarter produced no surprises, stable operation itself is already a positive. The company has proven its ability to complete the construction of the APLD large cloud provider campus on time and on budget, providing a reference for the subsequent construction of PFORGE and ELNFOR. However, the real challenges are equally prominent: the company needs to enter the capital markets on a large scale to complete financing for all pipeline projects. In addition to equity financing, the overall financing need is approximately $13 billion. Since April 2026, APLD and PFORGE bonds have outperformed the high-performance computing sector by about 200 basis points, making them one of the few successful targets in this year's high-performance computing track, but at the same time the bond supply pressure across the entire corporate group cannot be ignored. Based on the above judgment, JP Morgan downgraded the ratings of the aforementioned project bonds from "Overweight" to "Neutral"; however, it maintained its "Overweight" rating on the parent company entity and the ELNFOR project bonds.