“Invest” originates from the Latin term “to clothe” and evolved to become the Italian “investire”, which meant “to commit money to earn a financial return”.
At the heart of this definition is “commit”, which implies a length of time and calls for an attachment that yields returns.
To illustrate this to an extreme, when the annual fruits from an investment ( dividends or retained earnings) exceed the investor’s base or entry cost, the investment becomes an infinite, free option on future growth. The ultimate investment never needs to be sold; it does not rely on the existence of a buyer.
But the investing world of 2025 shows limited interest in these definitions. Media outlets and dinner parties are instead awash with discussions on price predictions for gold, crypto and artificial intelligence (AI) stocks.
All of these investments are dependent on the existence of buyers. Assuming they are rational, the buyers must believe they have greater insight into the future prices of these assets than the sellers.
Buyers also cannot be motivated by the fruit (profits or cash flow) from these assets, as there aren’t any — particularly for gold and crypto — but by the idea of felling a large tree; the capital return materialised on selling out.
This does not suggest that each of these assets is worthless, but that they are extremely risky. Gold has gained value over thousands of years through evolutionary instincts, symbolism and psychological attachment. It has a scarcity factor and its only real usefulness in portfolio management is that its price behaviour is at times opposite to other conventional asset classes.
Crypto is considered by many investors to be modern gold. Like gold, it ignites an investor backlash when one explores its virtues, and is impossible to value using conventional valuation techniques. It relies on pure belief.
Crypto is considered by many investors to be modern gold.
This sentiment is reminiscent of technology stocks in 1999 (JSE-listed Persetel/Comparex and DiData); financial stocks in 2008; building and construction companies in SA in 2016; and let us not forget Steinhoff. Unlike gold, crypto’s price characteristics have not been assessed over time.
This leads to AI, undoubtedly a life-altering industry and an easier place to demonstrate irrational exuberance with maths.
The mega technology stocks or hyperscalers are expected to deploy $3-trillion of capital into the AI ecosystem, of which $1.7-trillion is for tech hardware and chips, over the next four years. Their combined market capitalisation has risen by $12-trillion since ChatGPT was released in 2022. The market is pricing them at four times the replacement cost of these assets, which is called Tobin’s Q ratio.
In the technology industry, companies aim to generate a 15%-25% free cash flow margin. This margin is simply the ratio of free cash flow to net sales.
Considering $1.7-trillion of hardware investment by 2028, to meet a 20% free cash flow margin hyperscalers need to generate $500bn of free cash flow just to justify their cost of capital, which is assumed to be 10%.
Knowing the required cash flow required in 2028 and that 20% is a normalised free cash flow margin, we can calculate that $2.5-trillion of sales is needed in 2028 to justify all this investment.
If we then look at the clients of these hyperscalers and assume they want to make a 20% profit margin on the $2.5-trillion of revenue they give the hyperscalers, then the industry needs to generate $3.1-trillion of revenue to justify the $1.7-trillion of investments.
Based on various reports from large global investment banks that we follow, the technology industry is generating AI revenue of $2.5bn-$43bn in 2025, and the most bullish forecasts we can find to 2030 lift this number to about $780bn. This is vastly different from the required $3.1-trillion.
In conclusion, moving from an industry analysis to an individual company, to add credence to concerns of distortions in markets, look at the valuation of Palantir. Palantir trades at a forward price-earnings (PE) multiple of 268 times and 97 times its current revenues.
Placing Palantir on a PE that is more in line with a good technology business of 25 times, the company needs to grow its earnings per share at 159% a year for the next three years, 77% a year for five years and 21% a year for 15 years.
To contextualise this against research undertaken by McKinsey on sustainable growth rates of high-growth businesses, only 21% of companies have sustained growth rates exceeding 15% over 10 years.
In closing, Akira Kurosawa once said, “In a mad world, only the mad are sane.”
• Clayton is chief investment officer at Northstar Asset Management.
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