Applied Digital is undervalued: after falling 10% to $20.22 it trades below a roughly $26.50 DCF value, implying about 30% upside in 12 to 18 months, so the decline is a buying opportunity. Confidence is low; borrowing needs and 2028 contract renewals are risks, so only for very high risk tolerance.

Shares of Applied Digital fell by 10% today. In the case of Applied Digital, it has a backlog of orders exceeding $30 billion.

But in order to achieve those contracted revenues, it needs to build these data centers, secure power for them, and borrow billions of dollars to fulfill those agreements. Therefore, it is understandable that investors are concerned about their ability to continue doing so given the rising cost of capital and the potential for a debt market crisis.

So, investors ask me: "Is this the right time to sell this stock, or is it an opportunity to buy when the price is low?"

Applied Digital is one of the fastest growing companies in the world. In the most recent quarter, it exceeded analysts' estimates and achieved revenues of $342 million, representing a 322% increase compared to the same period last year.

Now, in order to achieve those goals, it has to spend a lot of capital to build these data centers. Its financial position is $3.7 billion in cash and cash equivalents, but the company also has more than $6.4 billion in debt on its balance sheet.

So, it has debts that are twice the amount of cash and short-term investments it has on its balance sheet.

Furthermore, it will likely need to borrow tens of billions of additional dollars in order to implement its ambitious project expansion plans. Applied Digital has $36 billion in core contract value, i.e., contracted revenue.

This will eventually turn into revenue once Applied Digital fulfills the commitments it has contracted to deliver. Until then, it cannot record that as revenue.

In order to generate those revenues, you need to have those computing capabilities to then hand them over to cloud computing giants such as Microsoft, Amazon, Alphabet, and MetaPlatforms.

Now, these agreements also include options that allow partners to expand the scope of deals, which could be worth up to $86 billion if all renewal options are activated. The near term looks very promising for companies such as Applied Digital, Nebius and Korweef.

However, the biggest question remains about the renovation processes. When these contracts expire, will the major cloud computing companies renew them and continue purchasing from those companies, or will these companies have sufficient data center capacity to meet their own needs, thus eliminating the need to rent capacity from Applied Digital, CoreWave, i-Rain, Nebius Group, and other external data center service providers who are striving to obtain their services?

But starting from 2028, what will the situation be like? This is the big risk when investing in companies like Applied Digital. Therefore, I have incorporated these recent developments into Applied Digital's discounted cash flow valuation calculations.

I increased the cost of the company's debt as that price continued to rise. In addition, I also increased the company's risk score. In general, I calculated my estimates of the free cash flow that I believe the company will generate from today to the long term, and discounted those cash flows using the cost of capital.

She concluded that the company's value should be around $26.50 per share. After today's decline, the stock price is now $20.22. Therefore, I believe this company is undervalued.

Now, I apply a safety margin of between 10% and 20%, given that this stock is one of the riskiest stocks in the market, and one of the most difficult stocks to evaluate because the estimates are more uncertain than usual.

With a company like Applied Digital, the process of making those estimates becomes increasingly difficult, and that's why I apply a larger margin of safety to account for this increased difficulty and higher variability in potential results.

So, despite all that, the stock still appears to be undervalued with the potential to rise by about 30% over the next 12 to 18 months. So, in response to the question I posed in the title, I believe this decline represents a buying opportunity, but my confidence in this rating is relatively low and my level of conviction in it is not high.

The reason for this is what I mentioned earlier, which is the uncertain range of potential results for Applied Digital, not only in the next few years, but also in the longer term.

While the stock appears to be undervalued and worth buying, I believe it should only be considered by investors with a very high risk tolerance, who are looking for huge returns and are prepared to accept the possibility of significant losses.