Nvidia(NASDAQ: NVDA), the world’s leading producer of data center GPUs, is one of the world’s most important artificial intelligence (AI) companies. So whenever it invests in a smaller AI company, it’s considered a bullish stamp of approval.
But when Nvidia sells one of those stocks, it’s considered a grim warning. For example, Nvidia accumulated 7.7 million shares of the AI data center builder Applied Digital(NASDAQ: APLD) in September 2024, but it sold that entire stake for about $177 million in the fourth quarter of 2025. Let’s see why Nvidia sold that hot AI stock — and why it might still be worth buying.
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Applied Digital builds and buys data centers, then leases them to companies that install their own servers. It originally rented those data centers to Bitcoin(CRYPTO: BTC) miners and other blockchain companies, but it pivoted toward the cloud and AI markets in 2022.
The rapid growth of those markets lit a fire under Applied Digital’s business, and it launched its own cloud-based AI infrastructure service in 2023. That new business grew rapidly, but it was unprofitable while competing against some of its own data center customers.
Last December, it announced it would spin off its cloud computing business and merge it with EKSO Bionics Holdings to create a new company called ChronoScale. That divestment, which hasn’t yet closed, will throttle near-term revenue growth but stabilize margins.
From fiscal 2022 to fiscal 2025 (which ended last May), its revenue surged from $8.5 million to $215.5 million. Those growth rates were impressive, but Nvidia probably didn’t invest in Applied Digital because it was expecting massive financial returns. Instead, it invested in Applied Digital — along with other smaller AI companies — to support the broader growth of the AI market. As the top provider of “picks and shovels” for that booming market, it’s smart for Nvidia to nurture the growth of smaller AI companies to drive more sales of its data center GPUs.
Nvidia was also a major investor in CoreWeave(NASDAQ: CRWV), a cloud-based AI infrastructure services provider that was also one of Applied Digital’s top customers. Investing in both companies helped accelerate their deployment of Nvidia’s GPU clusters.
From fiscal 2025 to fiscal 2028, analysts expect Applied Digital’s revenue to rise nearly fivefold to $1.05 billion as the data center boom continues. However, a single customer — most likely CoreWeave — accounted for 93% of its revenue in fiscal 2025. That customer concentration is a red flag, since CoreWeave is a rapidly growing but unprofitable company. Any reductions in CoreWeave’s data center spending could throttle Applied Digital’s top-line growth.
Applied Digital is also deeply unprofitable, and analysts don’t expect to turn profitable by generally accepted accounting principles (GAAP) until fiscal 2028. Wall Street’s forecasts also don’t fully account for its planned spin-off of ChronoScale, so we shouldn’t expect Applied Digital’s core business to grow as rapidly as analysts’ expectations for the entire company.
Since Nvidia is already invested in CoreWeave, it might not make sense to invest in Applied Digital as well. With a market cap of $7.7 billion, Applied Digital also looks a bit pricey at 22 times this year’s sales. Therefore, it’s possible that Nvidia dropped Applied Digital — along with Arm Holdings and WeRide — to rebalance its portfolio.
Nvidia’s exit cast a dark cloud over Applied Digital’s stock, but the company has already contracted roughly $16 billion in lease payments for the next 15 years. That equals more than $1 billion in average annual revenue (five times its fiscal 2025 revenue). To support that growth, Applied Digital aims to more than double its capacity within the next few years.
As the data center market expands and economies of scale kick in, Applied Digital could generate stable profits and progress toward its long-term goal of becoming a data center real estate investment trust (REIT) like Digital Realty Trust(NYSE: DLR) and Equinix(NASDAQ: EQIX) — which both pay out most of their pre-tax income as dividends.
Therefore, Applied Digital could grow much larger over the next decade as the cloud and AI markets expand. If you believe it will expand its customer base, increase its capacity, and stabilize its margins, it could still be a solid long-term investment.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Digital Realty Trust, Equinix, and Nvidia. The Motley Fool has a disclosure policy.
