Fermi Inc., a Texas company aiming to power data centers with natural gas plants and nuclear reactors, is moving at the speed of AI.
Barely a concept just 10 months ago, the company launched an IPO on Tuesday night, valuing it at $21 per share for a total market cap of $13.8 billion. The stock jumped 55% to $32.53 on Wednesday, and shares rose 14% after hours.
“My initial reaction was this is not possible,” said Nick Davis, a lawyer at Haynes Boone who advised on the offering, referring to the speed at which the company went public.
Founded in January, Fermi intends to build the largest data center campus in the world on a parcel of land in the Texas Panhandle that it is leasing from Texas Tech University. The 5,236-acre site, roughly nine square miles, will eventually be home to data center warehouses hooked up to natural gas plants, nuclear reactors, solar fields, and batteries, Fermi says. By 2038, the site could generate twice as much electricity as the power plants serving all of New York City, according to Fermi CEO Toby Neugebauer.
“It’s not a unicorn. It’s a multi-unicorn,” he said in an interview.
The stock is sure to attract attention from investors looking to cash in on the rush for electricity to power AI. But the company faces substantial challenges.
Fermi is like a car being built while it’s already in motion. The company is starting to cobble together the equipment it needs for these power plants, but so far it’s an ambitious vision without much physical progress. Buying the stock means believing that Fermi can overcome hurdles that have bedeviled better-established infrastructure companies.
Tapping equity markets could get Fermi closer to its goals. The company sold $682.5 million worth of shares to investors in New York and London, through a simultaneous dual-listing on the Nasdaq (ticker: FRMI) and London Stock Exchange. It will use most of that money to secure equipment for infrastructure. The company is structured as a real estate investment trust, or REIT, a kind of business normally known for paying large dividends. Fermi, which has no revenue yet, likely won’t pay dividends for years.
Matt Fry, a lawyer at Haynes Boone, said that using the REIT structure simplified some taxation issues related to the dual listing in London.
There is no company in the stock market today quite like this—a single-site REIT whose main assets will be power plants that have not yet been built. The closest corollaries might be data center REITs like Equinix—though Equinix owns the data centers themselves, not the power equipment, and has a 2.4% dividend yield.
Neugebauer cautioned against lumping Fermi in with other companies that own power plants. “We are not a utility,” he said. “I have zero interest in being in the utility business. I can’t overstate it. If this was a utility thing, I wouldn’t even be on the phone with you.”
Fermi does have some early advantages, including the name recognition of its founders. It was co-founded by Rick Perry, the former governor of Texas and U.S. energy secretary, his son Griffin Perry, and Neugebauer, a private-equity executive with experience financing power projects. It’s well-situated. Fermi’s site is located at the edge of a major natural gas field with access to multiple major pipelines that can supply its power plants. The company has secured natural gas turbine equipment, both new and used, at a time when there’s a turbine shortage. And it just signed a letter of intent this month with an unnamed data center customer looking to rent space on its campus for as long as 40 years. Neugebauer said its first customer is “a very big company and they are well recognized in the tech space.”
Fermi also faces several major hurdles because its project exists almost entirely on paper. It’s aiming to build its first nuclear reactor by 2031, one of four large reactors that will make up the Donald J. Trump Generating Plant. The latest reactors built using the same technology that Fermi is relying on took around 15 years to build, and went way over budget.
The company is unlikely to earn tenant revenue before 2027, and those revenues will build up gradually over time. Meanwhile, the company will have to tap capital markets to fund very expensive infrastructure up front. If it can’t get payments from tenants quickly enough to cover its debt needs, the company’s business model could teeter.
Timm Schneider, founder of energy consultancy Schneider Capital Group, wrote in a note that the model only works if cash starts flowing in, reducing the company’s need to tap high-cost debt. He sees plausible scenarios for Fermi stock to trade in an almost comically wide range: $7 to $105 per share.
“If operational performance stalls, leverage rises, costs snowball, and equity value can unravel–kick-starting a negative spiral,” he wrote. “This reflexive, self-reinforcing dynamic must be priced in–history is filled with both positive ( Amazon.com, Tesla Motors) and negative (dot-com, WeWork) examples of how it plays out.”
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