Applied Digital announced Monday it will spin off its cloud hosting business into a separate publicly traded entity, redirecting parent company capital toward AI infrastructure and high-performance computing. The company operates 160 megawatts of data center capacity across four facilities in North Dakota and Texas. Stock rose 11.3% in after-hours trading on the news.

The spinoff isolates approximately $82 million in annual recurring cloud revenue—traditional virtual server hosting, colocation, and managed services contracts signed between 2019 and 2022. Applied Digital will retain the newer AI-focused contracts, including a $460 million HPC hosting agreement with an undisclosed hyperscaler signed in October 2024. The spin transaction is expected to close in Q3 2025, subject to SEC approval and a Form 10 registration. No debt will transfer to the spun entity. Existing shareholders will receive pro-rata shares in the new company, ticker not yet assigned.

The move clarifies two business models that share infrastructure but serve different margin profiles. Cloud hosting operates on 18-22% EBITDA margins with three-year contract durations. AI infrastructure deals—GPU clusters leased to model training shops and inference providers—command 35-40% margins but require $120-$140 million in upfront capital per 20-megawatt build. Applied Digital has $340 million in liquidity as of its December 2024 10-Q. Management commentary on the Monday call indicated the spinoff frees $180-$200 million in working capital previously earmarked for cloud customer acquisition, now redirected to two expansion sites in Ellendale, North Dakota, breaking ground in May 2025.

The separation also resolves a valuation compression problem. Cloud hosting trades at 4-6x forward revenue in public comps—think Rackspace, DigitalOcean. AI infrastructure, scarce and capital-intensive, trades closer to 12-15x on a revenue multiple basis when capacity is pre-leased, as seen in CoreWeave's private rounds. Applied Digital's blended multiple sat at 7.2x before the announcement. The spin lets each business find its natural buyer base: cloud to dividend-focused value funds, AI infrastructure to growth allocators and sovereign wealth.

Operators should track three items. First, the Ellendale facility power contracts—Applied Digital holds 400 megawatts of reserved grid capacity but has only 160 megawatts energized. Second, the undisclosed hyperscaler in the $460 million HPC deal; if it's Meta or xAI, follow-on capacity orders typically come within 90-120 days of initial deployment. Third, the debt structure post-spin; Applied Digital carries $285 million in term loans at SOFR plus 550 basis points, maturing March 2027. Refinancing or upsizing that facility would signal confidence in the pipeline.

The spin closes before Applied Digital's fiscal year-end in May, meaning the first post-separation earnings print will land in July 2025 with a clean AI-only revenue breakdown and no cloud noise in the margin walk.