Surging AI Power Demand And Scarce Grid Capacity Will Support Long Term Tenant Contracts

Catalysts

About Fermi

Fermi is building a large scale private power grid and related infrastructure to supply electricity to energy intensive tenants such as data centers and chip ecosystem players.

What are the underlying business or industry changes driving this perspective?

• Rising power needs from artificial intelligence workloads are pushing large tenants to seek long duration, dedicated power solutions. This aligns with Fermi's multi gigawatt gas generation build and can support future revenue visibility once leases are executed.
• The scarcity of suitable generation equipment and large scale permits, including Fermi's 6 gigawatt air permit and application for an additional 5 gigawatts, can improve its negotiating position with tenants that are competing for power. This may support pricing and long term earnings potential.
• Growing engagement from both hyperscalers and chip makers around power sourcing and modular mechanical, electrical and plumbing buildouts creates a broader potential tenant and partner base for Fermi. This can support higher site utilization and revenue once agreements are signed.
• The shift toward modular MEP and plug and play data center buildouts can shorten tenants' time to deploy capacity. This may allow Fermi to move its construction in progress into service sooner and begin converting invested capital into revenue and operating cash flow.
• Fermi's focus on investment grade wraps and nonrecourse equipment financing can influence the mix of future leases and project debt. This may support net margins and earnings as power assets move from pre revenue construction into contracted operation.

Assumptions

How have these above catalysts been quantified?

• Fermi currently has no revenue. Analysts are forecasting revenue to reach $4.3 billion by June 2029.
• As a pre-revenue company, Analysts expect Fermi to achieve a profit margin of 75.4% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $3.54) by about June 2029, up from -$718.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 4.8x on those 2029 earnings, up from -7.8x today. This future PE is lower than the current PE for the US Specialized REITs industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Fermi is still pre revenue, has no definitive tenant leases in place and management explicitly states that tenant revenues are expected to begin in 2027 and will not cover full operating capital needs until the site operates at scale, so any delay or downsizing of tenant commitments could leave a large gap versus analyst revenue and earnings forecasts and extend the period of net losses.
• The core business model depends on attracting multiple large, investment grade tenants to optimize load diversity on a multi gigawatt private grid. However, current tenant discussions involve complex, multiparty, multibillion dollar deals and customers are pushing to lock in large amounts of power on favorable terms, which could pressure pricing, reduce expected net margins and weigh on future earnings if Fermi concedes too much to secure long duration contracts.
• Management highlights that power generation is being built ahead of tenant mechanical, electrical and plumbing build outs and calls the tenant side MEP schedule a bigger bottleneck than originally anticipated. If counterparties struggle to build their infrastructure on time, this could slow ramp up of utilization on installed assets and delay the conversion of construction in progress into revenue and operating profit.
• The company relies heavily on project level, nonrecourse equipment financing and expects Phase 0 and Phase 1 of Project Matador to require more than US$3b of capital. Management also warns that if capital is not available on acceptable terms it may need to delay investments, amend purchase commitments or surrender collateral, which would constrain growth of the asset base, limit revenue potential and could lead to lower long term earnings than analysts currently model.
• Fermi plans to elect REIT status and does not expect to pay dividends until REIT taxable income is material. The CFO also acknowledges the need to manage IPO lockup expirations and a potential orderly sell down by a large founding shareholder. If these equity and tax structure issues create share price volatility or constrain access to new capital, this could restrict future development, slow revenue growth and limit improvement in net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $19.0 for Fermi based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $4.3 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of $8.8, the analyst price target of $19.0 is 53.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.