Applied Digital and Cipher Digital Suffer Consequential Losses Amid Rising Yields
The recent market downturn has seen two prominent players in the AI infrastructure space, Applied Digital Corporation (NASDAQ: APLD) and Cipher Digital Inc. (NASDAQ: CIFR), experience significant losses. On September 1, Applied Digital dropped approximately 4% while Cipher Digital fell roughly 6% as the 10-year Treasury yield climbed to 4.79%. This reaction has exposed a central tension in the AI buildout, highlighting the delicate balance between long-term customer contracts and the debt required to construct massive campuses.
Long-Term Contracts vs. Debt Burden
Applied Digital Corporation boasts 1.41 gigawatts of contracted capacity and $36.2 billion of base-term contracted revenue, supported by take-or-pay arrangements. Cipher Digital Inc. has described $11.4 billion of contracted revenue across its long-term data-center leases. Proponents of these companies argue that creditworthy counterparties and long contracts turn power-rich sites into infrastructure annuities rather than speculative data-center shells. However, critics counter that contracted revenue is not the same as cash today, as campuses require substantial construction, equipment, interconnections, and debt service before they mature.
Execution Risk and Construction Delays
The opportunity for Applied Digital and Cipher Digital is substantial, but it also magnifies execution risk. Delays or budget overruns can consume capital well before contracted payments arrive, putting a strain on these companies' financials. Rising yields pressure both companies through the same mechanism, increasing the discount rate applied to distant cash flows and raising the cost of refinancing or funding later phases. While Applied Digital's take-or-pay structure offers some protection if facilities arrive on time, Cipher's guarantees may improve bankability but do not remove construction risk or automatically make every dollar of debt attractive.
Investor Sentiment and Market Volatility
Despite the challenges facing these companies, hedge funds have continued to expand their exposure. Applied Digital was held by 59 funds in the second quarter, up from 39, and Cipher ownership rose to 72 funds from 49. However, some investors have begun to trim their positions, with Hood River Capital Management reducing its Applied Digital stake by 3% and D. E. Shaw cutting its Cipher stake to 14.5 million shares. The high float percentage of Cipher Digital, with 65.5 million shares sold short as of August 14, can amplify volatility, leading investors to debate whether leveraged builders will keep enough of the economics.
Implications for the AI Infrastructure Market
The losses experienced by Applied Digital and Cipher Digital serve as a reminder of the complexities and risks involved in the AI infrastructure market. As the industry continues to grow and evolve, investors must carefully consider the balance between long-term contracts and debt burden, as well as the potential for execution risk and construction delays. While some investors remain optimistic about the potential of these companies, others are taking a more cautious approach, seeking out alternative AI stocks with greater upside potential and less downside risk.
