Applied Digital surges as Q1 revenue jumps 84% on AI infrastructure demand

Applied Digital Corporation (NASDAQ: APLD) reported an 84% year-on-year revenue surge in the first quarter of fiscal 2026, reflecting aggressive expansion in its high-performance computing (HPC) hosting operations and tenant fit-out services linked to generative AI workloads. The stock climbed over 14% in after-hours trading on October 9, as investors digested a mix of record topline growth, mounting capital expenditures, and deepening strategic partnerships. While the headline figures impressed, the underlying profitability metrics painted a more complex picture — with widening GAAP losses and compressed gross margins.

What are the key drivers behind Applied Digital’s 84% revenue growth in Q1 FY26?

Applied Digital posted total revenue of $64.2 million in Q1 FY26, up sharply from $34.8 million in the year-ago period. The biggest driver was a steep ramp-up in tenant fit-out services, which contributed $26.3 million, marking the first time this category became a major revenue engine. Hosting revenue from the company’s AI data centers came in at $37.9 million, reflecting a 9% year-over-year increase and continuing the positive trend from the previous quarter.

According to company filings, the revenue beat was fueled by ongoing tenant activity across Applied Digital’s multi-campus infrastructure buildouts, particularly the Polaris Forge 1 site. These activities are closely tied to long-term leases for AI workloads, where hyperscale clients are increasingly outsourcing both compute and facility design needs. The company said that infrastructure construction revenue related to tenant buildouts now represents a strategic focus, even though it introduces higher cost variability and temporary margin drag.

Applied Digital’s management team reiterated its confidence in the AI data infrastructure supercycle, arguing that the 84% top-line growth demonstrates “incredible demand” for scalable, high-density compute capacity. However, they acknowledged that the Q1 performance was skewed toward one-time project revenue, not recurring leasing income — a distinction that investors will watch closely going forward.

How is Applied Digital balancing revenue growth with profitability and margin pressure?

Despite its rapid revenue acceleration, Applied Digital reported a GAAP net loss of $27.8 million (or $0.11 per share), widening from a net loss of $10.5 million in the same period last year. On a non-GAAP basis, adjusted net loss stood at $7.6 million, or $0.03 per share, reflecting ongoing efforts to strip out the volatility associated with ramp-up costs and lease transitions.

Gross margin came in at 3.6%, down from 40.6% in Q1 FY25. This decline was primarily due to the capital-intensive nature of the company’s tenant buildouts, which come with substantial cost-of-goods-sold expenses. The cost of revenue surged 144% year-on-year, reaching $61.9 million, while general and administrative expenses also ballooned 165% to $15.1 million.

Company executives said that margin compression was expected due to timing mismatches between investment in infrastructure and the recognition of longer-term lease income. As new campuses become operational and tenant leasing transitions from capex-heavy fit-out to recurring revenue, Applied Digital expects margins to stabilize.

Still, the firm’s cash position stood at $114.1 million, while total debt reached $687.3 million, underscoring the importance of timely capital drawdowns and careful liquidity planning in the quarters ahead.

What strategic deals and expansion milestones are shaping Applied Digital’s AI data center roadmap?

The most significant strategic development in the quarter was Applied Digital’s lease agreement with CoreWeave, a fast-growing AI cloud infrastructure firm. The deal includes 150 megawatts of capacity at the Polaris Forge 1 campus, a move that brings the total expected lease value from CoreWeave to approximately $11 billion over the next decade.

In parallel, Applied Digital secured $112.5 million in funding through a preferred equity drawdown from its $5 billion financing agreement with Macquarie Asset Management. The company also locked in a separate $50 million credit facility with Macquarie Equipment Capital to support the development of Polaris Forge 2, a planned 300 MW AI data center campus.

These funding mechanisms are intended to accelerate Applied Digital’s infrastructure rollout without resorting to dilutive equity issuance. Management emphasized that both campuses — Forge 1 and Forge 2 — are being built with AI-native workloads in mind, supporting high-density, liquid-cooled rack configurations that traditional colocation centers may struggle to accommodate.

The company now expects Forge 1 to be fully constructed by the end of calendar 2025, with lease revenue beginning to materialize as tenant fit-outs are completed. Meanwhile, Forge 2 is being positioned as a follow-on build, with early interest reportedly strong among large language model (LLM) providers and AI startup tenants seeking scalable training capacity.

How are institutional investors responding to Applied Digital’s revenue surprise and stock surge in Q1 FY26?

Applied Digital’s share price jumped 14.2% in after-hours trading following the Q1 announcement, reflecting enthusiasm for the company’s growth trajectory even amid ongoing losses. Analysts covering the stock pointed to the 84% revenue beat as evidence that Applied Digital is riding a structural wave in AI compute demand — especially as cloud hyperscalers like Amazon, Microsoft, and CoreWeave continue to outsource parts of their infrastructure stack.

However, several institutional research desks urged caution. Some noted that the non-recurring nature of the tenant buildout revenue makes it difficult to extrapolate the Q1 surge into long-term forecasting models. Others flagged Applied Digital’s elevated debt-to-equity ratio as a key risk, particularly in the context of rising interest rates and limited cash flow visibility.

Consensus forward valuation multiples remain elevated compared to legacy hosting peers, with several brokerages citing “execution overhang” as a key limiter on near-term upside. Still, bullish analysts see Applied Digital as a rare pure-play on the generative AI infrastructure gold rush — and argue that long-term leases and power-secured campuses make it more resilient than software-based AI firms vulnerable to model commoditization.

What key risks could affect Applied Digital’s growth trajectory, and which financial or operational metrics should investors watch next?

While Applied Digital’s revenue momentum is undeniable, investors will be closely watching for consistent lease revenue recognition, margin normalization, and debt management. The next two quarters are expected to include continued tenant activity, but the recognition of predictable monthly recurring revenue will be the real test of the model’s sustainability.

Another area of concern is execution risk. Delays in campus construction, shifts in power availability, or zoning and regulatory headwinds could disrupt timelines and tenant satisfaction. The company must also carefully manage its exposure to a small number of large clients — particularly CoreWeave — to avoid overconcentration.

Management said that Q2 is likely to see “sequential revenue growth,” particularly as Polaris Forge 1 ramps further. However, they did not offer full-year revenue guidance, citing timing uncertainties. The market will be parsing capital deployment timelines, tenant milestones, and any updates on lease commencements at Forge 1.

Why Applied Digital’s growth narrative remains compelling even as high capital intensity tests investor patience

Applied Digital is evolving into a foundational player in the next phase of AI infrastructure buildout. With vertically integrated campuses, long-term lease commitments, and strategic financing partners in place, the company is well-positioned to ride the AI wave.

However, it remains a capital-intensive, execution-heavy story — one where even a minor delay in campus completion or client onboarding could trigger investor concern. The Q1 print was a reminder of both potential and fragility. Investors chasing AI infrastructure exposure may continue to view Applied Digital as a high-beta vehicle tied to hyperscaler capex trends.

In short, the story is working — but now comes the hard part: proving that growth can be translated into durable margins and long-term free cash flow.