Yes, the target directory is specified as a parameter and can be anywhere.

So I did create an application update using the below parameters.

./directory-artifact-gen -n {ARTIFACT_NAME} -t {DEVICE_TYPE} -d {DEST_DIR} -o {OUTPUT_PATH} ${FILE_TREE}

But the application update is stuck at 69%. Am I missing something?

Edit1: It has been stuck at 69% for about 2 hours now

Can you provide output from journalctl -u mender-client on the device?

journalctl replied back saying no new entries. But the application update failed and the error is

2020-09-15 13:41:41 +0000 UTC error: Fetching Artifact headers failed: installer: failed to read Artifact: readHeaderV3: handleHeaderReads: Artifact Payload type 'directory' is not supported by this Mender Client

It feels like I need to add something in my local.conf

Maybe you are missing:

PACKAGECONFIG_pn-mender-client = " modules"

This could also go into a bbappend file for mender-client.