The Inverted Pyramid Paradox: Tech Giants’ Dependence on Undervalued Real Assets
The Great Mispricing
A paradox has emerged in global equity markets: companies with intangible assets now account for over 90% of total market valuation, while the value of companies with tangible, "real" assets—especially in energy and materials—has shrunk to historically low levels. This divergence appears unjustified, as even the most intangible-heavy firms remain fundamentally dependent on energy and materials for their operations and growth.
The paradox can be visualized as an inverted pyramid, with the bulk of asset value, represented by technology companies, precariously resting on the tip, symbolized by energy and material companies.
There’s no denying that intangible assets like intellectual property, brand value, and software have become essential in the modern economy. A study by advisory firm Ocean Tomo revealed that in 2020, intangible assets constituted 90% of the S&P 500’s total assets—a dramatic rise from just 17% in 1975. Investors are well-versed in this shift, with companies such as Apple, Microsoft, Amazon, and Alphabet dominating global equity markets.
However, this trend has led to an increasing imbalance between the market capitalizations of firms driven by intangible assets and those with significant real assets, particularly in the energy and materials sectors. The top seven companies—Apple, Amazon, Google, Meta, Microsoft, Tesla, and Nvidia—now account for over 30% of the S&P 500's total value, while the energy and materials sectors combined represent just 5.7%. Yet, without a reliable supply of energy to power data centers or materials to manufacture semiconductors and fiber optic networks, the operations of these tech giants would cease.
Consider, for example, data centers and semiconductors—the very core of the "AI revolution" that has driven equity prices to unprecedented highs. Data centers, the backbone of cloud computing and digital services, are massive consumers of energy. In 2020, they accounted for approximately 1% of global electricity consumption, but this figure is projected to rise to 5% by 2030, equating to the energy needs of an entire country the size of Germany being added to the global grid.
Semiconductors, which are at the heart of data centers and virtually every electronic device, require highly specialized materials and vast amounts of energy to produce. From the extraction of raw minerals to the final product, manufacturing a single semiconductor involves a dozen major steps, each consisting of multiple sub-processes. This intricate process spans the globe, with significant energy consumption occurring at every stage—from mining the raw materials to the final assembly and distribution. The sheer scale of energy and material demands underscores the deep interdependence between high-tech industries and the traditional sectors that provide the resources and power necessary to fuel the AI-driven economy.
Globalization and the rise of the ESG narrative have been two key drivers leading to the 'inverted pyramid' paradox. One of the most valuable dividends of globalization was the abundant and ready supply of strategic resources. For decades, unfettered access to and circulation of energy and materials fueled unprecedented economic growth and technological progress, while keeping resource prices relatively suppressed. Simultaneously, we came to understand that human activity, particularly the burning of fossil fuels, has been adversely affecting the planet's climate and the quality of life for its inhabitants. This awareness spurred a variety of political and cultural responses, leading to a significant reduction in capital flowing into the energy and materials sectors.
The combination of abundant supply and a lack of investment has created a valuation gap that seems irrationally wide. For instance, the forward price-to-earnings (PE) ratio for the technology sector currently stands above 27, while it's below 20 for Materials and less than 12 for the energy sector. The undervaluation of the latter sector is particularly striking; despite making up only 3.5% of the index, energy companies contribute 21% of total S&P 500 earnings. The sector's weight is now less than half of its 20-year average.
The inverted pyramid paradox may present a unique opportunity for more cognizant investors.
Globalization is reversing, and capital flows are constrained by high government debt and rising interest rates. At the same time demand for strategic materials is not slowing. In fact, it's accelerating as economic nationalism fuels the reshoring of infrastructure and supply chains, while demand from emerging economies continues to rise.
The market's valuation discrepancy between intangible-heavy companies and those focused on real assets overlooks the intricate supply chains enabling the former to function. This misallocation of capital has led to economic distortions, underinvestment, and an increased risk of supply bottlenecks, vulnerability to shocks, and geopolitical disruptions. While companies rich in intangible assets have driven much of recent economic growth and stock market gains, their success remains inextricably linked to the often underappreciated energy and materials sectors. The complacency born from past resource abundance has resulted in mispricing, setting the stage for potential opportunity.
Disclosure: Not investment advice. Do your own research. Hold all assets mentioned. X @pietroventani for more timely comments and updates.