Watch for the lesser companies when the AI shakeouts happen, says NYU's Aswath Damodaran
Speakers
Aswath Damodaran
— Professor of Finance, NYU Stern
Summary
Aswath Damodaran argues that the AI trade likely peaked months ago and a further correction is coming, with the lesser AI companies most at risk. He sees Meta, Alphabet, and Microsoft facing deteriorating returns on massive AI capex, while the Mag-7 overall remain protected. On Micron he is open to a bullish secular-demand narrative but still considers it richly priced.
- Damodaran believes the AI trade peaked a few months ago and expects more consolidation and correction ahead.
- He argues the Mag-7 are financially protected, but lesser AI companies will be the ones hit hardest in a shakeout.
- Looking at Meta, Alphabet, and Microsoft, he sees a sharp drop in marginal returns on invested capital from AI capex.
- These three mega-caps risk becoming more capital-intensive, lower-return companies, which investors are not pricing in.
- On Micron, he acknowledges the secular AI demand shift but notes the stock remains richly priced on normalized earnings.
- He highlights that investors are buying AI dips out of fear of missing out, not because fundamentals have improved.
Ideas
Watch lesser AI companies for shakeout
The Magnificent 7 are financially strong with ample cash flows and debt capacity, but the lesser AI companies are much more vulnerable. Recent stories like Situational Awareness show how quickly trouble can hit smaller AI names. Watch for a shakeout in the rest of the AI space, not in the Mag-7.
META, GOOGL, MSFT face deteriorating returns
Heavy AI capex is driving a sharp drop in marginal returns on invested capital at META, Alphabet, and Microsoft. Unless they deliver earnings commensurate with the tens of billions being invested, these companies will become more capital-intensive and lower-return businesses, a risk that investors in these names are not used to and are underestimating.
