Aswath Damodaran, the NYU Stern professor widely known as the “Dean of Valuation,” is sounding an alarm about the artificial intelligence boom. His warning: the next AI shakeout will land hardest on smaller companies. The Magnificent Seven — Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, Tesla — have enough cash flow and balance-sheet muscle to ride out a downturn. Everyone else? Not so much.
Why the Dean sees trouble ahead
Damodaran points to a clear signal: falling marginal return on invested capital at three of the biggest AI spenders. Meta, Alphabet, and Microsoft are all seeing their ROIC drop. He calls the decline “remarkable” given their size. For companies that have poured billions into AI infrastructure, that trend is a red flag.
He also cites the collapse of the Situational Awareness hedge fund as a sign of how quickly AI sentiment can shift. The fund, which bet heavily on AI winners, blew up. That kind of event, Damodaran argues, shows that the market’s enthusiasm can reverse fast — and when it does, the weakest players get crushed first.
The other side: a bullish take on the same fear
Not everyone reads the same tea leaves the same way. Tom Lee, a market strategist, sees the widespread AI capex fear as a bullish signal. His logic: when doubt is this pervasive, the cycle still has room to run. In other words, the very anxiety that Damodaran warns about is, to Lee, evidence that the AI trade isn’t over.
The two views couldn’t be more different. One says falling returns and a hedge-fund blowup mean trouble. The other says the same fear means opportunity. Both are looking at the same facts.
Damodaran’s core concern is about capital intensity. He warns that unless the hyperscalers — the biggest cloud and AI infrastructure players — post earnings that match their AI spending, Big Tech will become more capital-intensive with lower returns. That’s a structural shift. If the spending doesn’t pay off, the companies that can least afford it will be the first to suffer.
The Magnificent Seven can absorb the hit. Their cash flows are enormous. But smaller firms that have borrowed or raised equity to chase AI growth may find themselves trapped if the revenue doesn’t materialize.
The next big test comes when these companies report earnings. Investors will be watching to see whether the billions spent on AI chips and data centers are translating into revenue growth — or just eating into margins.
