The 25× problem
A multiple such as 25× is often discussed as if it were a property of a company. It is better understood as a compact set of assumptions. At 25× revenue, an investor pays $25 today for each dollar of current annual revenue. That can be rational if revenue grows rapidly, margins become high, reinvestment produces attractive returns, and competition does not erase the economics before the distant cash flows arrive.
Consider a hypothetical company valued at 100 units at 25× revenue. Current or forward revenue is approximately 4 revenue units. If mature free-cash-flow margin is 30%, that revenue corresponds to 1.2 cash-flow units of FCF at maturity if revenue were unchanged.
100 / (4 × 30%) ≈ 83× FCF
The valuation is therefore not explained by current economics alone. It relies on growth and duration. Suppose revenue compounds at 25% for five years:
4 × 1.25⁵ ≈ 12.2 revenue units
If 30% is a post-reinvestment FCF margin, that becomes about 3.66 cash-flow units of annual FCF. The margin cannot be inferred from revenue growth or operating margin; it already embeds the reinvestment required to produce that growth. The 100-unit valuation then represents about 27× that fifth-year FCF before discounting and terminal assumptions. Again, not impossible. But the investor has implicitly purchased a future in which both scale and margin survive.
AI complicates the duration term. The technology can accelerate competitor formation, lower software-production cost, reduce switching friction, create functional substitutes and compress customer costs. A 25× multiple is therefore partly a claim about the half-life of scarcity.
High multiple = growth claim + margin claim + moat-duration claim + terminal-value claim
The paper's central valuation question is not 'why 25×?' in the abstract. It is: what specific residual scarcity makes 25× durable when intelligence lowers the cost of attacking the scarcity?
Growth requires capital, not just a revenue exponent
The five-year revenue path is not itself a cash-flow forecast. Free cash flow must deduct the investment required to support growth:
FCFₜ = NOPATₜ − net investmentₜ
gₜ ≈ reinvestment rateₜ × incremental ROICₜ
A constant 30% post-reinvestment FCF margin while revenue compounds at 25% is therefore a joint assumption about operating margin, capital intensity and incremental return on invested capital. It cannot be carried forward from revenue growth alone. If incremental ROIC falls, the same growth requires more reinvestment and produces less distributable cash.