Aswath Damodaran, the NYU Stern professor known as the "Dean of Valuation," says Microsoft, Amazon, Meta and Alphabet are collectively overinvesting in artificial intelligence. He argues none of the four has spelled out a business model to justify combined capital spending that could reach $745 billion this year, even as prediction markets show little sign of expecting a downturn.
Aswath Damodaran, the NYU Stern professor known as the "Dean of Valuation," says Microsoft, Amazon, Meta and Alphabet are collectively overinvesting in artificial intelligence, chasing the fear of falling behind as much as any clear path to profit. Speaking on the Prof G Markets podcast this week, he argued the AI spending race among the four companies has gone too far. As Damodaran put it, "But that's betting, that's not investing."
Big Tech's $745 Billion AI Bet
The four companies could spend as much as $745 billion on capital expenditures this year, with AI infrastructure driving much of the increase. Amazon expects about $220 billion. Alphabet has guided to $195 billion to $205 billion.
Microsoft has budgeted approximately $175 billion. Meta, meanwhile, expects $130 billion to $145 billion. Damodaran isn't worried about the size of the checks, since he says the companies can afford them.
His concern, instead, is that none of the four has spelled out what business model the spending is meant to deliver. Damodaran suspects they truly don't know.
From Software Margins to Manufacturing Costs
Five years ago, Damodaran says, the four firms generated returns on invested capital of 70%, 80%, even 90%, with almost no incremental spending required. AI has changed that math. The companies, he says, now resemble manufacturing companies, pouring capital into chips, power and data centers, and facing a question they never had to answer before: whether the return on that capital exceeds its cost.
Cloud Growth Complicates the Picture
Amazon posted 37% AWS growth, its fastest pace in more than four years, and CEO Andy Jassy has argued AI servers can pay for themselves within three years. Microsoft's Azure revenue, meanwhile, jumped 43%, beating expectations, with both companies saying demand still exceeds the capacity they can build.
But strong sales don't settle Damodaran's question, which is whether the revenue will ever be large enough to justify the capital behind it. Meta illustrates that gap. The company generated $60.8 billion in quarterly revenue, up 28%.
Free cash flow collapsed 91% to $784 million. Capex, meanwhile, hit $31.1 billion.
Markets Aren't Pricing a Bust
Traders on Polymarket see just a 15% chance of an AI industry downturn by December 31. Roughly $2.3 million has traded on the contract. The bar is high: the market only resolves yes if at least three severe events occur within 90 days of each other, such as Nvidia falling 50% from its all-time high or OpenAI or Anthropic going bankrupt.
Damodaran isn't predicting that outcome either. He owns five of the Magnificent Seven, says he can live with current valuations, and calls debt levels at the major players fully manageable.
Still, he worries about their prudence and what they are doing with AI investment.
Source: Benzinga
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