Singularity Scalers: Creating Generational Wealth in the Age of AI.

Mental Model

Edited by Brian Birnbaum.

Singularity Scalers like Palantir promise to deliver exponential returns to shareholders over the long term. This will likely also drive great returns for Nvidia and AMD shareholders.

There’s a breed of companies that are positioned to grow their earning power exponentially and at a marginal cost, in tandem with the evolution of AI models. These companies have proprietary datasets which enable them to create AI models that others can’t. The value created by these datasets is growing exponentially as AI continues to improve, with marginal investments on behalf of these companies. In turn, this is driving margin expansion and enhanced free cash flow generation.

I call these companies Singularity Scalers.

The best example of a singularity scaler is Palantir. They provide the infrastructure required for companies to harness their proprietary data moats. Said infrastructure is getting easier to deploy and operate as AI models get better, which has increased margins and cash from operations notably over the past two years, as you can see in the graph below. As AI models continue to get better, margins will likely continue to rise speedily, driving stock prices up further.

As Agentic and Physical AI models come along, Palantir’s platform will likely become exponentially more valuable. When Palantir plugs these models to their platform, it will suddenly become an AI worker factory without major investments. Similarly, Duolingo will become an AI teacher factory, thus becoming much more valuable than it is today. This leap will enable both companies (and other singularity scalers) to compound their proprietary data moats at a faster pace, making them harder to replicate over time.

The key component of a Singularity Scaler is the ability to create an impenetrable proprietary data moat, which is usually the result of world-class process power. By focusing intensely on a single task for a long time, these companies end up creating a platform with no competition. The platform then yields unique data which can then be used to create highly differentiated AI models. Indeed, the value isn’t in the AI models themselves but in the underlying infrastructure that enables the continuous creation of models that outperform.

Investor sentiment is on shaky ground because AI fundamentals are advancing exponentially. Humans can only think in linear terms, which makes the current landscape eery for the average investor. However, Jensen Huang revealed in yesterday’s GTC conference that AI scaling laws continue to accelerate. Notably, reasoning workloads are driving a 100X higher demand for compute than Nvidia estimated last year. This means singularity scalers are about to take off big time.

Jensen’s remarks about this during the GTC conference were fascinating to listen to:

On a first principles basis, the difference between 1999 and today is that AI models are directly accretive to free cash flow production. An in depth analysis of Meta and Amazon, for example, reveals that AI models enable them to make more money in an increasingly defensible manner as they get better and more capable. I term this relationship the Intelligence Yield and so long as it holds, I believe Singularity Scalers will continue to deliver exponential returns over the long term.

The Intelligence Yield is perpendicular to the economy, geopolitical factors and other variables that are shaking the stock market over the past month. AI models continue to improve regardless of tariffs and wars, expanding margins and driving higher free cash flow production for Singularity Scalers. While these companies will enhance their earning power fastest, I also believe the broader economy will benefit tremendously in time. Ultimately, the Intelligence Yield is set to increase the amount of value the economy creates per unit of input.

The Intelligence Yield is also driving rapid growth for chip companies like Nvidia and AMD. Companies make more money as they buy and deploy more chips, with the new AI workloads requiring exponentially more compute power. Most notably, AMD is down over 50% in the past year, although datacenter revenues continue to grow exponentially. As I explain in my latest AMD update, AMD has a highly differentiated roadmap that the market currently fails to understand. And I expect AMD to evolve into an Nvidia-like success in the coming years.

However, this sort of technological dynamic is particularly prone to bubbles. This is why I approach tech investments with great emphasis on asymmetry. I like to buy companies that are set to increase their value considerably if AI evolves modestly or not at all. After that, the Intelligence Yield merely presents additional upside and not a necessary condition for the thesis to be profitable in the first place. This was Palantir at $7 and Spotify at $97.50 for me - although most believed these two companies to be way too expensive at those levels.

Back in 2022 Spotify was set to become much more valuable by deploying audio verticals beyond music, thus increasing average revenue per user and ultimately free cash flow per share non-linearly. Its lead in the audio space has now granted Spotify the proprietary dataset required to solve problems that both creators and fans share, which is most likely to exponentiate the company’s value over the coming five years. I think they’re going to do that by leveraging AI - but if AI doesn’t work out, I’ve still made six times my money.

The perception of asymmetry is non-transferable. You have to develop your own understanding of a business, which usually comes from dedicating a lot of time to studying fundamentals. For an investment to be asymmetric, the market must disagree with your thesis by definition. Therefore, you need to have a different and superior interpretation of widely available data. Further, in order to make money you need to hold your conviction firmly over years while the market figures things out.

Thus, although the idea of Singularity Compounders presents great upside for investors, the risk of over-enthusiasm is palpable. The best way to capitalise on this idea is by spotting an extraordinary business that is disdained by the market, that is also highly likely to accelerate its value creation process in tandem with AI progress, at a marginal cost. While it’s tempting to chase hot stocks, pursuing your own learning journey patiently will ultimately reveal clear opportunities that others won’t be able to see.

This individuated approach has also led me to investing into Palantir and Spotify early, positioning me to further reap the benefits of the AI revolution with great margin of safety. I didn’t chase Peloton back in 2021 - I focused on my own journey and I recommend that you do the same. It’s taken me a decade of intense work to get good at spotting extraordinary companies early, but you can get a head start by taking my course. In under two hours–I teach you everything I know in an elegant and powerful mental model that over 400 students have happily integrated to date.

Until next time!

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Disclosure

These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.