Fermi (FRMI) has collapsed on news that a major counterparty has pulled out. The loss of the tenant is not insurmountable as there are, at least in theory, plenty of other potential tenants who would want to take their spot.
I think this adverse news is merely a catalyst for the latest leg of the 63% price drop since we warned about Fermi back in October. Frankly, the problem was a valuation that was almost impossible to overcome. FRMI was trading at an $18 billion market cap despite having raised only around $2 billion in total capital.
To make investors whole, Fermi was faced with the Herculean task of turning every dollar raised into $9 of value. Absolute perfection is required for such a task, so setbacks such as this loss of a major tenant are simply not allowed.
Fermi is not the first company to have poor returns when raising capital during a hype wave nor will it be the last. I posit that if someone knows the warning signs and does their homework, most of these failures can be spotted in advance.
The paradox of capital raising
It’s easy to raise capital where you shouldn’t and difficult to raise capital where you should.
Capital can be most opportunistically invested in out of favor sectors due to valuation. Yet it’s quite difficult to raise capital in these sectors because few people want to invest in these areas.
At the same time, it’s much easier to raise capital in the most hyped areas of the market. Those wanting to amass capital can attach themselves to the flavor-of-the-month hype and draw from the large pool of investors who want to get in.
The sad reality of the world of finance is that founders win as soon as capital is raised. Even if it eventually leads to poor returns, the founders often get rich in the process. This creates the potential for adverse incentivization in which the ease of raising money can be put ahead of the merit of the idea.
I have no means of discerning the intent of anyone involved with regard to Fermi or any other entity. I’m merely pointing out the monetary incentives as a concept of which to be aware.
Consider the parties involved in a capital raising campaign:
- Broker-dealers get paid a percentage of what they raise.
- Founders are given a massive number of shares and draw salaries from the capital raised.
Both entities gain reputation when the project is a success, but so much of the financial gains are front-loaded so there’s a powerful incentive to just get the money raised, no matter what.
During the internet bubble, the easiest way to raise capital was to pitch a new dot com.
Tens of billions were raised on the hype.
During the COVID investing mania the easiest way to raise capital was to attach to SPACs, memes, NFTs, crypto, or other nonsensical, non-revenue-generating junk.
Tens of billions were raised on the hype.
During the REIT boom of 2021, the easiest way to raise capital was to attach to the highest-flying property sectors.
Blackstone alone raised many billions at a time when properties were selling at cap rates around 5% (very low ROIC by historical standards).
During the AI bubble, the easiest way to raise capital was to attach to anything AI-related.
AI, of course, has some fundamental merit, but too many investment dollars are chasing it too quickly.
The hype affords swift capital-raising campaigns, which in turn can lead to sloppy investment.
How to avoid investing in bad capital raises
Bad capital raises generally fall into two categories:
- Bad idea.
- Structurally doomed.
While there are some ideas that inherently have no merit, the vast majority of concepts on which capital is raised have the potential for profit generation. Determining if a given idea is a “bad idea” is thus a judgment call based on ad hoc analysis.
In this regard, Fermi passes the sniff test. It’s clear that there’s high demand for data centers and that those data centers will require access to reliable power. As such, an electrified data center campus in an area with an inherently low cost of electricity is a reasonable idea.
If one were to invest in such an idea cleanly, it would strike me as a reasonable use of investment dollars.
However, Fermi fails the second bad capital raise test, which is that it was structurally challenged.
There are always going to be expenses incurred in starting up a company, so even a cleanly designed investment vehicle will not invest a full dollar for every dollar raised. However, there are degrees of inefficiency, and the more built-in inefficiency a capital raise has, the more it becomes an uphill struggle.
At the horribly inefficient end, there are things like SPACs. We went into greater detail on the follies of the SPAC structure back in January of 2021, but the basic idea is that through a PIPE and other reward mechanisms, a high percentage of shares are gifted to management/founders such that the capital from investors is dramatically diluted.
Fermi had similar issues in that management and founders were given shares and allowed to purchase shares at a very low price. That’s the less than $2 billion capital raised against the $18B market cap we discussed in our previous article.
Equity investors are so diluted at the start that it’s just an extremely difficult hole from which to dig out.
When investing in a start-up I think it’s crucial to make sure you’re investing at a price that is at least somewhat close to the average price at which shares were issued (free shares should be included in that calculation).
If $1B is raised in an IPO and IPO investors are getting 10% of the company, that company better have assets worth at least somewhere close to $10 billion.
That just wasn’t the case with Fermi. IPO pricing was absurdly high relative to the percentage of the company IPO investors got.
What about now at the reduced price?
FRMI’s stock price is all over the place today (12/12/25), so I will comment based on the pricing as of this screenshot (intraday about 2:30 Eastern).
SA
Despite being drastically lower, FRMI is still hopelessly overvalued.
Asset value still largely just consists of the cash raised and the idea. Cash raised is a small fraction of the market cap and the idea has certainly lost some of its intangible value with the primary tenant pulling out.
In order for the idea to have enough value, we would need to see potential tenants clamoring over each other, offering to pay higher and higher rent to secure spots in Fermi’s planned megacampus.
Instead, the one major tenant that was going to pay to secure a spot has seemingly abandoned the transaction
It’s still entirely possible that Fermi will find enough tenants to launch a viable data center campus, but it certainly doesn’t look like the unbridled demand environment for which they were planning.
Further downside catalyst
The drop in share price that has occurred so far has just been on the small amount of floating shares.
More shares are about to be unlocked as the 90-day and 180-day lock-ups expire. As those shares become tradable, I suspect management and others will want to cash in. It could be a large wave of selling pressure.
Bull case for FRMI
The bull case for Fermi is that they can obtain expedited access to power and get ahead of other power providers, thus making their campus far more valuable to potential data center tenants. If they have a sufficient lead, the lost tenant could end up being just a hiccup and easily replaced.
In my opinion this is unlikely because there are still significant hurdles, such as the need for a few billion more in capital to build out the power plants.. However, it should be noted as a potential.
The Bottom Line
Even at its reduced price, Fermi is substantially overvalued. I remain bearish on FRMI until the valuation gets more reasonable and the future revenues look a bit more established.
