Aswath Damodaran, the NYU Stern professor known as the “Dean of Valuation,” says Big Tech is “collectively overinvesting” in artificial intelligence, driven as much by fear of being left behind as by any clear path to profit.
Speaking on the Prof G Markets podcast this week, Damodaran argued that the AI spending race among Microsoft Corp. (NASDAQ:MSFT), Amazon.com Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META) and Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) has gone too far.
“If you bet big on a growth business and it works out, you’re going to be this insanely valuable company,” he said. “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, according to their latest forecasts, with AI infrastructure driving much of the increase.
Amazon expects about $220 billion, Alphabet $195 billion to $205 billion, Microsoft approximately $175 billion and Meta $130 billion to $145 billion.
Damodaran’s concern is not the size of the checks. He says the companies can afford them.
The problem, he argues, is that “none of these companies has enunciated what exactly the business model is that they hope to deliver.” Damodaran suspects they truly don’t know.
From Software Giants to Manufacturing Companies
Five years ago, Damodaran says, these firms generated returns on invested capital of 70%, 80%, even 90%, with almost no incremental spending required.
AI has changed that. “The other companies are now the equivalent of manufacturing companies,” he said, pouring capital into chips, power and data centers, and facing a question they have never had to answer: whether the return on that capital exceeds its cost.
Cloud Growth Offers a Counterargument
Amazon posted 37% AWS growth, its fastest in more than four years, and CEO Andy Jassy has argued AI servers can pay for themselves in under three years.
Microsoft’s Azure revenue jumped 43%, beating expectations, and both companies say 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%, while free cash flow collapsed 91% to $784 million as capex hit $31.1 billion.
Prediction Markets Aren’t Pricing a Collapse
Traders on Polymarket see just a 15% chance of an AI industry downturn by Dec. 31. Roughly $2.3 million has traded on the contract.
The bar for the contract is high. The market only resolves yes if at least three severe events happen within 90 days of each other, such as Nvidia falling 50% from its all-time high or OpenAI or Anthropic going bankrupt.
Damodaran is not predicting that outcome either. He owns five of the Magnificent Seven and says he can live with current valuations, with debt levels at the major players fully manageable.
“I just worry about their prudence and what they’re doing in terms of AI investing,” he said.
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