Investors are pulling back from leveraged AI data center developers, sending Applied Digital (NASDAQ: APLD) shares down 4% to trade around $19.59 in a broad rotation out of debt-heavy infrastructure stocks.

TeraWulf (NASDAQ: WULF) fell 3% to $12.28 as the selling pressure spread across the sector, while Core Scientific (NASDAQ: CORZ) retreated 2% to $14.21 in the same session.

The Global X Data Center and Digital Infrastructure ETF (NASDAQ: DTCR) dropped 0.6%, with Applied Digital representing 4.5% of net assets according to its May 31 holdings report.

The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) gained 0.3% during the same period, leaving the day’s losses concentrated squarely among leveraged AI builders.

JPMorgan analysts cut Applied Digital’s project finance bonds to Neutral from Overweight this week, citing a looming supply overhang as the company prepares to borrow again to fund its construction pipeline.

Applied Digital raises project debt ahead of rental income by building AI data centers and leasing them to hyperscalers under long-term contracts, and it carried $6.4 billion in debt against $3.7 billion in cash and restricted cash at the end of Q1 FY2027.

Its most recent capital raise was $1.59 billion in 7% senior secured notes designated to fund a third HPC building at Polaris Forge 1 in North Dakota.

Chief Financial Officer Saidal Mohmand addressed concerns directly on the October 7 earnings call, stating, “Our goal remains to maintain one of the strongest balance sheets in the industry through the majority of the construction phase and we’ll execute as such.”

Mohmand also said, “We don’t underwrite leases where 100 basis point move would impact our economics really,” pushing back against fears that rising borrowing costs could erode the company’s margins.

Despite the stock pressure, Applied Digital’s Q1 operating results were unusually strong, with revenue hitting $341.9 million, up 432.4% year over year and well above the $124.6 million analysts had forecast.

The company’s adjusted loss of $0.01 per share also significantly beat the expected loss of $0.3023, while adjusted EBITDA jumped to $64.4 million compared to just $0.5 million in the same quarter a year earlier.

The HPC Hosting segment alone generated $262.6 million of Q1 revenue, underscoring the scale of Applied Digital’s hyperscaler relationships and the revenue potential embedded in its contracted backlog.

When those results were filed on October 7, Applied Digital stock sat at $25.45, but a net loss of $184 million under standard accounting rules, driven by non-cash fair value losses, stock-based compensation, and rising interest expense, weighed on sentiment.

The company’s long-term bull case centers on 1.41 gigawatts of leased critical IT load representing $36 billion in contracted revenue over initial terms, or $86 billion including renewals.

CEO Wes Cummins has argued that restrictions elsewhere in the market strengthen the value of what Applied Digital already controls, stating, “Put simply, we view every new restriction elsewhere as making what we already own harder to replicate.”

Applied Digital plans to finance Polaris Forge 3, Delta Forge 1, and Delta Forge 2 next, all tied to one tier-one hyperscaler under 15-year take-or-pay contracts, and management has expressed “a high level of confidence” in securing favorable rates.

A successful debt raise at competitive pricing could redirect market focus toward the company’s committed revenue backlog and ease near-term concerns about the cost of its capital structure.

Until that raise closes cleanly, the JPMorgan downgrade and the scale of Applied Digital’s outstanding debt continue to argue for measured position sizing among investors watching this sector.