Aswath Damodaran, a finance professor at New York University, has issued a warning that a potential crash in the AI sector could be more severe than the dot-com bust of 2000. In his podcast 'Intangible Economy,' Damodaran explains that the AI industry requires significant investment in physical infrastructure and is largely financed through debt. This makes the sector more vulnerable to a correction, which could have broader societal impacts beyond just shareholders. Damodaran also questions whether the AI business model can scale as expected, noting that costs do not automatically decrease with more users, unlike traditional software businesses. "Every additional use burns compute, similar to how Spotify pays for each stream," he says. This contrasts with Netflix, where high content costs are spread across a growing user base. "Growth paired with thin margins could actually destroy value," Damodaran adds. He also highlights the risk of price erosion from Chinese competitors like Deepseek, which are already operating at low margins. Source: thedecoder

Damodaran warns that the bull case for AI depends on replacing entire jobs rather than selling AI as a tool. If AI fulfills this promise, "half of white-collar workers" could lose their jobs. He calls this scenario the "AI fever dream," emphasizing the need for society to start thinking about the potential costs. "The scary thing is the big stories you tell that can justify AI, if they come true, are going to create some insane costs for society that we better start thinking about right now," he says. Source: thedecoder

Damodaran, who owns five of the seven so-called 'Magnificent Seven' stocks, acknowledges that these companies are fundamentally changing due to their heavy AI investments. He now analyzes capital expenditures and depreciation, which were previously irrelevant for capital-light companies. "These companies grew with minimal capital spending, but now they're building massive factories and infrastructure that will be depreciated over ten years but could be obsolete after five," he says. "I'm not sure they really know what they're getting themselves into," Damodaran adds. Source: thedecoder