New York University professor Aswath Damodaran believes the next phase of the artificial intelligence trade could be difficult for smaller companies, even as technology stocks have started recovering in recent sessions.
Speaking to CNBC on Monday, Damodaran said he believes the market has already passed “peak AI,” adding that the sector is likely to witness further consolidation and correction over the coming months. According to him, the greatest pressure is unlikely to fall on the biggest technology companies but on smaller AI-focused firms that have fewer financial resources to absorb a downturn.
“My bet is that we hit peak AI a few months ago, and that there will be more consolidation and correction in the months ahead,” Damodaran told CNBC. “I think when you see a shakeout in the AI space, it’s not so much the Mag Seven we should be watching, but the lesser companies.”
His comments come after AI-linked stocks experienced sharp selling in recent weeks as investors shifted money into other parts of the market. The Roundhill Memory ETF (DRAM) has dropped 36% from its recent peak, while the iShares Semiconductor ETF (SOXX) is down 22% from its recent high.
Recent rebound driven by FOMO
Although technology shares have bounced back, Damodaran questioned whether the recovery is being supported by business fundamentals. Major US indices, including the Dow Jones Industrial Average and the S&P 500, have climbed to fresh record highs as investors returned to beaten-down technology stocks. However, Damodaran believes the renewed interest is largely driven by investor psychology rather than improving financial performance. “People say, ‘Hey, now I have a chance to have an AI company in the space.’ I wouldn’t put it deeper than that,” he said.
Hyperscalers remain better positioned
Damodaran described the largest technology companies that continue to invest heavily in AI infrastructure as the “most protected” players in the industry. Strong cash flows and greater access to financing give these companies a better chance of managing an extended slowdown compared with smaller rivals.
Even so, he cautioned that these companies are taking on more debt while investing tens of billions of dollars in AI infrastructure, raising concerns over whether those investments will generate adequate returns.
“Unless they start delivering earnings commensurate with the tens of billions of invested in capex, you’re going to see a very different kind of company emerging from the mix,” he said. “Nothing wrong with that, but I think investors in these companies are not used to what the risks are of investing in a more capital-intensive company.”
Damodaran has consistently expressed concerns about AI valuations. In 2023, he argued that Nvidia shares had become significantly overvalued, estimating the company’s fair value at roughly half its market price at the time