Fish meal (FM) replacement is essential for the sustainable expansion of aquaculture. This study focussed on the feasibility of replacing FM with a single‐cell protein (SCP) derived from methanotrophic bacteria (Methylococcus capsulatus, Bath) in barramundi fry (Lates calcarifer). Three isonitrogenous and isoenergetic diets were formulated with 0%, 6.4% and 12.9% inclusion of the SCP, replacing FM by 0%, 25% and 50%. Barramundi fry (initial body weight 2.5 ± 0.1 g) were fed experimental diets for 21 days to assess growth performance, gut microbiome composition and gut histopathology. Our findings revealed that both levels of SCP inclusion induced detrimental effects in barramundi fry, including impaired growth and reduced survival compared with the control group (66.7% and 71.7% survival in diets replacing FM with SCP by 25% and 50%, respectively; p < .05). Both dietary treatments presented mild necrotizing enteritis with subepithelial oedema and accumulation of PAS positive, diastase resistant droplets within hepatocytes (ceroid hepatopathy) and pancreatic atrophy. Microbiome analysis revealed a marked shift in the gut microbial community with the expansion of potential opportunistic bacteria in the genus Aeromonas. Reduced overall performance in the highest inclusion level (50% SCP) was primarily associated with reduced feed intake, likely related to palatability issues, albeit pathological changes observed in gut and liver may also play a role. Our study highlights the importance of meticulous optimization of SCP inclusion levels in aquafeed formulations, and the need for species and life‐stage specific assessments to ensure the health and welfare of fish in sustainable aquaculture practices.