Rick Perry's Firm Undermines the AI Energy Efficiency Thesis

Fermi Inc.'s Turmoil Raises Red Flags for the Hyperscaler Thesis

The vastness of the universe is often cited as a reason for the Fermi Paradox, which questions the lack of extraterrestrial life. However, a more pressing paradox has emerged in the energy sector, centered on Fermi Inc., an AI-energy firm co-founded by former Energy Secretary Rick Perry. Despite seemingly insatiable demand for electricity from hyperscalers, Fermi has struggled to secure a hard power contract from these companies.

The dissonance has become unbearable, with Fermi's stock price plummeting 69% since its initial public offering last September. The company's turmoil is an alarm bell for the overhyped hyperscaler thesis, which has driven power forecasts and valuations across the sector. The weekend's C-suite revolution, which saw Chief Executive Officer Toby Neugebauer and Chief Finance Officer Miles Everson leave abruptly, has been spun as "Fermi 2.0." However, this rebranding effort has done little to alleviate concerns.

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Fermi's struggles are a cautionary tale about hyped-up IPOs. The company's initial stock-market debut was fueled by ballooning forecasts for datacenter power demand and a tiny free float, which juiced its valuation to a peak of over $19 billion. However, the scene has shifted dramatically, with the company's valuation now hovering around $3 billion.

The appointment of Jeffrey Stein, co-founder of restructuring boutique Breakpoint Partners, to the board has added to the sense of unease. Investors had become antsy at the continuing lack of an anchor tenant, particularly after a Business Insider report in December claiming Amazon.com Inc. had pulled out of a potential deal. Neugebauer and Everson spent much of the defensive earnings call at the end of last month talking up prospects for a tenant agreement and listing funding sources, but their efforts failed to reassure investors.

Fermi's combined capital expenditure over 2026 and 2027 is forecast to be $6.8 billion, nine times forecasted Ebitda and more than double the current market cap. The company's reliance on non-recourse equipment financing credit has raised concerns about its financial stability. The appointment of an interim CFO and the creation of an "office of the CEO" have also added to the sense of improvisation.

The turmoil at Fermi is a warning sign for the energy sector, where the artificial intelligence boom has stoked a build-it-and-they-will-come mentality. Developers of advanced nuclear reactors, such as Oklo Inc., have seen their valuations skyrocket despite lacking licensed designs. However, Jigar Shah, former head of the Department of Energy's Loan Programs Office, has cautioned that forecasts of 100 gigawatt-plus expansions in power demand from Silicon Valley executives are running into the stubborn physical realities of the grid.

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The need to maintain buffers of spare capacity, both on the grid and off, means that the net capacity required would be 182 gigawatts. This is a daunting task, particularly given the US power grid's history of struggling to meet dispatchable capacity targets. The more exuberant forecasters of datacenter demand must surely pause in the face of such evidence, or rather lack of it.

Fermi is premised on offering hyperscalers a shortcut to plugging in. However, the company's struggles have raised questions about the feasibility of this approach. The AI sector's seemingly desperate need for power and its rich resources have not been enough to overcome the logistical challenges of securing a hard power contract.