Fermi Inc. (NASDAQ:FRMI) saw its shares tumble approximately 17% in after-hours trading Thursday following the announcement of a proposed $350 million convertible senior note offering. The move, aimed at bolstering the company's cash position for its ambitious AI-powered campus development in Texas, has instead sharpened investor focus on rising debt levels and potential dilution.
The notes, set to mature in 2031, include an option for initial purchasers to acquire an additional $52.5 million in principal. Proceeds will be partially used for capped call transactions to limit dilution upon conversion, with the remainder allocated for general corporate purposes. However, the financing significantly increases the company's leverage, with pro-forma total indebtedness reaching approximately $789.1 million as of March 31, up from $439.1 million, according to the offering memo.
Balance Sheet Strain
Fermi's pro-forma cash and equivalents stand at $557.5 million after the note sale, but this masks a tighter liquidity position. As of June 30, the company reported just $92.0 million in cash and equivalents, including $29.2 million in restricted cash. With 629.8 million shares outstanding, the after-hours share price of about $6.07 values equity at roughly $3.8 billion, making the $350 million note equivalent to about 9% of market cap. Full exercise of the greenshoe would push that to 10.5%.
While not immediate dilution, the convertible note represents a significant overhang for a company with no revenue. Fermi has yet to generate any revenue from operations, with its latest quarterly filing confirming no revenue-generating activities had started as of March 31. The company expects almost all future revenue to come from leasing to hyperscale cloud providers.
Project and Regulatory Risks
Adding to investor unease, the Institute for Energy Economics and Financial Analysis (IEEFA) released a report Thursday questioning both the cost and approval pathway for Fermi's planned nuclear cooling system. The company has not yet settled on a cooling method for its four planned reactors, and IEEFA analyst Dennis Wamsted argued that Fermi should not proceed without Nuclear Regulatory Commission (NRC) approval for its first-of-its-kind hybrid cooling system. Wamsted noted that no large U.S. reactor has used anything other than water for cooling, and the cost of the alternative system remains unclear but is expected to be extremely high.
Fermi disclosed in its filing that it has held early discussions with seven potential tenants and 12 potential joint venture partners, with talks more advanced for a smaller subset. However, the company warned that such deals could involve issuing a material amount of new shares, further pressuring the stock.
Tax Status and Competition
Fermi also announced it is deferring its plan to elect real estate investment trust (REIT) status, opting to remain a C corporation through the short tax year ending December 31, 2025. The company made no commitment to a REIT election for 2026, adding uncertainty to its tax strategy.
Competition remains intense, with established players like Digital Realty Trust (NYSE:DLR) and Equinix (NASDAQ:EQIX) already operating global data center networks. Fermi must still convert its land, permits, and financing into operational revenue, a process that remains in its early stages.
Market Context
The broader market provided little support, with the Nasdaq Composite rising 1.30% and the S&P 500 adding 0.81%, driven by semiconductor stocks. However, AI-related names remained volatile. Ross Mayfield, investment strategy analyst at Baird, described the environment as an AI bull market but cautioned that the rally depends on stable oil prices and interest rates.
The convertible note offering buys Fermi time, but it leaves critical questions unanswered. If the company cannot secure a tenant or joint venture partner, or if nuclear cooling approval faces delays, the capped call may do little to ease dilution fears. Conversely, a major anchor customer could transform the deal from a defensive move into a strategic catalyst. For now, investors are voting with their feet, signaling that the balance sheet has outpaced operations.
