Aswath Damodaran: Big Tech Has No Idea How AI Pays Off

Ed Elson and Scott Galloway are joined by Aswath Damodaran to break down the biggest takeaways from Big Tech earnings. He explains what the latest results reveal about the AI race, why he's becoming increasingly concerned about the Magnificent Seven's AI spending, and how he values the hyperscalers. They also discuss how much AI risk is already priced into the market and whether SpaceX's current valuation is justified. Subscribe to the Prof G Markets Youtube Channel Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Speaker 00

  This episode is brought to you by Michelob Ultra. Good times mean competitions between you and your friends. Like seeing who can throw some pigskin the farthest or rush the field the fastest. Winner gets an ultra because it's not just a superior like beer. It's also giving fans superior access to their favorite sporting events. Superior is worth playing for. Visit michelobultra.com/superioraccess to enter. Enjoy responsibly. Copyright 2026 Anheuser Busch InBev Michelob Ultra Beer, St. Louis, Missouri.

• 0:30Speaker 01

  The new LinkedIn Hiring Pro can't undo your last hire. The no show. Who set you back because they didn't show up on day one or day two or ever again? And now your product launch is delayed because you're talking to alien abduction podcasters to track them down. But LinkedIn Hiring Pro can help make sure your next hire sticks. In fact, businesses who use LinkedIn are 24% less likely to reopen a role in the next 12 months. Hire right the first time with LinkedIn Hiring Pro. Post a free job today at LinkedIn.com/quality.

• 1:00Speaker 02

  Chronic migraine is 15 or more headache days a month, each lasting four hours or more.

• 1:04Speaker 03

  Botox, onabotulinum toxin A, prevents headaches in adults with chronic migraine before they start. It's not for those with 14 or fewer headache days a month. It prevents on average eight to nine headache days a month versus six to seven for placebo.

• 1:17Speaker 04

  Prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection, causing serious symptoms. Alert your doctor right away as difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life threatening condition. Patients with these conditions before injection are at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Allergic reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions, including ALS, Lou Gehrig's disease, myasthenia gravis or Lambert Eaton syndrome, and medications, including botulinum toxins, as these may increase the risk of serious side effects.

• 1:54Speaker 02

  Why wait? Ask your doctor, visit botoxchronicmigraine.com or call 1-800-44-BOTOX to learn more.

• 2:00Scott Galloway?

  Today's number 48. That's the percentage of US adults who now support the idea of banning phones for the full school day. Ed, why did the smartphone need glasses?

• 2:10Ed Elson?

  Why?

• 2:10Scott Galloway?

  Because it lost all its contacts.

• 2:23Scott Galloway?

  How are you, Ed?

• 2:23Ed Elson?

  I'm doing well. I've got to tell you, I'm excited for vacation, which is happening for me in about two weeks.

• 2:29Scott Galloway?

  Where are you headed? Oh, wait, we talked about where you're going somewhere fabulous.

• 2:31Ed Elson?

  I'm going to Austria. I'm going to a wedding in Germany and then I'm going to drive to Kitzbühel in Austria.

• 2:37Scott Galloway?

  Oh, Kitzbühel, I've been to Kitzbühel. It's great. Quite frankly, it's great for kids.

• 2:41Ed Elson?

  I'm very excited. It'll be very nice. We'll go hiking, we'll play sports, we'll do saunas and swim. It'll be a very health oriented vacation, which is exactly what I want right now.

• 2:58Scott Galloway?

  It's a wedding, you said?

• 2:59Ed Elson?

  Yeah, I have a wedding first and then I've attached, sort of bolted on a vacation next to it. So I'm pretty proud of how I've kind of maneuvered this because we have the wedding in Bavaria, which will be awesome. And then rent the car, drive about two hours into Austria and then spend the week at a hotel. So I'm, I'm, I'm very excited about this one.

• 3:22Scott Galloway?

  That is exciting. You know, you know what Austria's greatest achievement is?

• 3:26Ed Elson?

  What's that?

• 3:26Scott Galloway?

  Convincing everyone Hitler was German.

• 3:30Scott Galloway?

  He's back.

• 3:30Ed Elson?

  I was waiting for Hitler. I knew it had something to do with it. That's actually a good point. Yeah, that's true. They did convince them. He's an Austrian.

• 3:39Scott Galloway?

  Yeah. Everyone thinks it's a German. Nope, Austrian. Nope.

• 3:44Ed Elson?

  Do you have vacation plans?

• 3:45Scott Galloway?

  The better question is do I have work plans? I'm on vacation most of the time, as, as your team knows. Yeah, I'm here in Colorado and I had to.

• 3:52Ed Elson?

  Oh, you're on vacation?

• 3:53Scott Galloway?

  Well, I'm on vacation. I'm up at 7:30 doing these Joey Bagadon a podcast with you. But technically, I mean, my kids are out causing trouble and bored and, and doing hikes and shit like that. And I saw a bear last night, actually in town, which was kind of, which was kind of fun.

• 4:11Ed Elson?

  Brown bear?

• 4:12Scott Galloway?

  Yeah, a little brown bear. My son said, should we run? I'm like, no, you stay here. I'm going to run.

• 4:18Ed Elson?

  Those are very, very dangerous animals.

• 4:20Scott Galloway?

  I saw this, one of those TikToks about what kills, what animal kills the most people? And everyone's so freaked out about sharks. Moose kill more people than sharks.

• 4:30Ed Elson?

  Yeah, moose, I'm, I've heard that moose can be quite aggressive.

• 4:33Scott Galloway?

  Yeah, and hippopotami and crocodiles. Snakes kill a shit ton of people, I think mostly in India, but.

• 4:41Ed Elson?

  This is what you've been doing on your vacation?

• 4:43Scott Galloway?

  Well, of course, you know, the animal that kills the most people, right?

• 4:45Ed Elson?

  Um, no, I don't. What is that?

• 4:47Scott Galloway?

  The amateur answer is a mosquito, but the, the animal that kills the most humans is other humans.

• 4:54Scott Galloway?

  So it's true. We're the problem. We're the problem.

• 4:58Ed Elson?

  The amateur answer is the mosquito. How many times have you had this conversation?

• 5:04Scott Galloway?

  I think it's fascinating. Have you been through those? It's really interesting what, what animals are dangerous and which ones aren't.

• 5:11Ed Elson?

  Should we turn this into an animals podcast? Maybe that's what this should be.

• 5:14Scott Galloway?

  Oh, I would love to bring on, I like that guy, the dog with the Oscar guy who goes into homes and then establishes his dominance over the chihuahua that thinks it's a.

• 5:24Ed Elson?

  Yes, Cesar Millan. Is that who you're talking about?

• 5:26Scott Galloway?

  Yeah, yeah, he was really good.

• 5:27Ed Elson?

  Yeah, no, he's great.

• 5:28Scott Galloway?

  Despite the fact you hate dogs.

• 5:32Ed Elson?

  That's the underrated stat about me. I do prefer cats.

• 5:36Scott Galloway?

  That's not going to help our downloads. Did you, you had a dog, but not a cat growing up, right?

• 5:40Ed Elson?

  I did have a dog. And as everyone knows, he was, he was okay. He was an average dog at best.

• 5:48Scott Galloway?

  I think it's more the owner that was the problem here.

• 5:52Ed Elson?

  That's fair enough. I think that's probably true. All right, well, we've got a very exciting interview to get into here. We recorded this conversation live on Substack earlier this week. And if you'd like to catch the next live stream, we'll be doing plenty more. Then you should head over to profgmedia.com and subscribe to Prof G Plus. Without further ado, let's get into it. Today we are joined by the one and only Dean of Valuation Professor Aswath Damodaran for our quarterly review. We will break down the latest earnings from big tech. We'll get his take on SpaceX after its blockbuster IPO and we'll discuss whether we should be worried about the growing debt behind the AI bailout, among plenty of other topics. So let's get into it. Professor Damodaran, thank you so much for joining us.

• 6:36Ed Elson?

  I'm going to launch us right into it. I want to start with big tech earnings. It seemed pretty good across the board. Microsoft revenue up nearly 20%. Amazon revenue up 20%. Meta revenue up nearly 30%. The response was kind of mixed. I have some underlying questions about these earnings, but I'd love to just start with your reactions to what we saw in Q2 from big tech.

• 7:04Aswath Damodaran?

  On revenue growth, you're absolutely right. I think the company's delivered more than expected in terms of revenue growth. And that's good news, at least in the near term. On the earnings level, what, what you notice is it's, it's happening under the surface. These companies are so big that you don't see them. The marginal returns that these companies are making, basically the incremental earnings, relatively incremental invested capital, continue to show a shift in business models, which I think investors need to keep their eye on. It's neither good news nor bad news. These are very different companies than the companies investors were investing in five years ago. And I think we need to talk about what's happening, at least outside of Apple, and

• 7:47Aswath Damodaran?

  what's happening to Mag7 that's changing these companies and changes what investors need to look at going forward.

• 7:54Ed Elson?

  I mean, the thing that jumped out to me, if we just go straight down to the bottom line, if we go to the free cash flow, Meta's free cash flow came down 91%. Amazon's free cash flow went negative. Google's went negative, which is something that I don't know if anyone thought would ever happen, certainly wouldn't have predicted it several years ago, just due to how much money these companies make and somehow they found a way to spend it. Does that concern you?

• 8:20Aswath Damodaran?

  It's something that needs to be thought about more seriously. These are long-term shifts. If it's a one-year change, you might say, okay, they had a big investment this year. They're going to go back to being cash cows next year. I don't think that's going to happen at these companies. The one company in the mix that's had experience with this negative to positive cash flow and back again is Amazon. So in many ways, if you're going to pick a company that's equipped to deal with negative cash flows, it'd be Amazon because they've seen this movie before. They've lived through it. For their 25 years, you look at them, they're in and out of cash flows and they've found a way to always get back. For Meta, for Alphabet and for Microsoft, this is new territory, something they've

• 9:04Aswath Damodaran?

  never had to deal with. And the question is whether they're, they're equipped to deal with a very different kind of company going forward. And this is in the top down. These are more capital intensive businesses. As anybody who's run a capital intensive business will tell you, it's a very different business model, a much more difficult business model to generate value from than the models that they used to use pre-AI.

• 9:28Scott Galloway?

  When you said investors need to be cognizant of the fact that they're investing in much different companies than they were five years ago, can you give us a broad overview or get as specific as you want us? What type of companies were these five years ago and what type of companies are they now?

• 9:41Aswath Damodaran?

  These companies five years ago, if you asked me what their invested capital was, I wouldn't even have cared because you knew that they could generate revenues and operating income with very little additional invested capital. Outside of acquisitions, even with R and D considered, these companies generate returns of 70, 80, 90% invested capital. The only survivor from that group is Apple, which still continues to deliver that kind of return and analysts are not happy with it because it's not investing. The other companies now are the equivalent of manufacturing companies. They're building huge capacity for whatever, AI products and services. And like all manufacturing companies historically, they're now going to be judged on whether

• 10:22Aswath Damodaran?

  they can deliver the earnings on this investment, something they've never had to do historically. So measures like return on invested capital, it used to be not that useful with tech companies, now come into play. Questions are, are you earning more than your cost of capital? A laughable question five years ago with these, with these companies now becomes a relevant question. And I think that is the question on which these companies will live or die. If they can manage to deliver returns that exceed their cost of capital, I think they can come out on the other side as more capital intensive, but still valuable companies. But if they fail, markets are punitive on companies that invest a lot of capital and can't deliver the earnings to justify that capital.

• 11:04Scott Galloway?

  My sense is when the market gets these earnings, it's not about the earnings, it's about the capex and the market's ability to discern and return somewhere down the road on that capex. And if you were on the board of one or more of these companies and you were head of the, you know, the finance committee or the audit committee, obviously every company struggles with the tension between investing for the future and trying to build moats around your business while recognizing, you know, while not getting too far out in front of your skis. Where do you think the kind of that that fulcrum or that tension is right now? As you look at these companies, do you agree with the markets right now? Or recently that the capex has quite frankly gotten a little bit out of control?

• 11:49Scott Galloway?

  Or do you think that these guys are in a unique position to do it? So why not do it?

• 11:53Aswath Damodaran?

  I think the lesson that Facebook should have learned from the metaverse investment fiasco is investing is easy, spending money is easy, but spinning a narrative that markets get of why you're spending the money and what your business model is going to be is just as critical. As an investor in these companies, my concern is not that they're spending money. I think they can afford to spend the money. I can see that they're going for growth, but none of these companies has enunciated what exactly the business model it is that they hope to deliver. I mean, at the very minimum, are you going for scale with low margins? Is this the kind of business I should be looking at? Are you going for premium products

• 12:36Aswath Damodaran?

  with high margins and niche markets? What is it exactly you're planning to do? And for the moment, at least, that's not there. And maybe they don't know, but then they need to be open about the fact that they're trying stuff out just as much as the rest of us. It's scary for markets. But you know what? If you don't say something, markets fill in the vacuum. The fact that you're not being open about your business model, markets look at that and say, hey, maybe you don't have a business model, which is one reason markets have turned increasingly skeptical about the capex. Because you remember early on, two years ago, when they started the capex, it was all good news. Look how much money they're spending. The assumption was, hey, they're smart companies. They'll

• 13:18Aswath Damodaran?

  figure a way out to make money. But markets are recognizing that you can be a smart company. But you've got the situational awareness, I hate to bring that in, component of you're smart and perhaps you're too immersed in this space to step back and ask the objective question of, is there really a business here that can justify not a billion, five billion in capex, but tens of billions of capex? And I think those questions are only going to get louder. If I were on the board of these companies or the top management, I'd be thinking seriously about the business narrative and not just throwing out the capex numbers and leaving them at that because markets are going to continue to respond negatively

• 14:02Aswath Damodaran?

  to big capex numbers without a story backing the capex.

• 14:06Scott Galloway?

  There's an outlier here. We have a tendency to talk about big tech as if they're all one amorphous blob. And the real outlier I see is the following. Everyone is spending between that we're talking about today, 150 to 200 billion in capex, but Apple is at 11 billion. Apple has made a distinct decision to pursue a dramatically different strategy. As far as I can tell, they've said, we're not going to engage in the capex wars of AI. And I mean, it strikes me as a very big bet. Like, one of them is wrong. Thoughts on that?

• 14:42Aswath Damodaran?

  I agree with you. This is going to be a classic case study 10 years from now as to whether it's better to wait out the uncertainty and then decide what kind of factory to build, rather than build a factory first and worry about what can we produce from the factory. I mean, the analogy I keep coming back to is this factory building exercise, which is Apple is saying, we don't know enough about this space. We don't know yet whether the kinds of products and services that AI will deliver will be low cost, high scale products, which will require a very different kind of factory than this premium product, high margin, lower scale business. And I think even within the LLMs, you see

• 15:27Aswath Damodaran?

  this fight, you know, with OpenAI versus Anthropic. Anthropic clearly is going for the premium pricing strategy. And OpenAI surprisingly is saying, hey, maybe the big market here is to sell stuff for at a lower cost and sell at scale. And the Chinese are, of course, waiting on the sidelines to throw the story into complete turmoil because they can come in. And this briefly, we saw this with DeepSeek a couple of years ago, coming in and shaking up the story to alter everybody. The only problem for Apple is they're facing the side costs of the huge AI capex in the sense that chip costs have gone up and they're facing, I mean, part of the reason they got punished so much was because they had raised

• 16:12Aswath Damodaran?

  the prices of almost every single device because everything has become more expensive to make. So much as Apple would like to be completely on the sidelines, at least for the moment, they cannot be because they get dragged into this space because of what everybody else is doing. But I think you're right. And I think it reflects Tim Cook's personality. And it'll be interesting to see if it continues under the new CEO of saying, look, you know, jumping in with both feet into things you don't know is not the greatest way to make money. He's a cautious person. And analysts have taken issue with Apple for being cautious. And I think it kind of shows up in the way he's chosen to run the business. But I think it indicates why CEOs matter because a much more ambitious CEO at the top of Apple would

• 16:57Aswath Damodaran?

  have probably charted a different path. And you'd have seen Apple with tens of billions of AI investment as well.

• 17:03Ed Elson?

  As with you mentioned, this idea that they haven't, none of these, the hyperscalers have really articulated what the ROI on these AI investments are actually going to be. And when they do report their ROI, it's generally in kind of these, as vague a metric as possible. Like, Amazon says, oh, we generated $25 billion in AI ARR. And it's like, okay, why are we doing ARR? Why don't we just like hear the actual revenues? But the worst of all is Meta, who is, they're not saying anything. And Zuckerberg was literally asked the question, like, how are you going to generate the return? And he just filibustered. He didn't answer the question. He didn't talk about the cloud plans. You said something really interesting.

• 17:48Ed Elson?

  You said, maybe they don't know. Is that possible? If this is a trillion dollar bet, could they really not know?

• 17:57Aswath Damodaran?

  I think they truly don't know. And I think that they're afraid to say that. But I think in this business, they're better off being transparent about what they don't know. What I'd like them to do is just as they've done with the cloud business, which is clearly a money-making business to them, is to have an AI division, a separation of AI, where they tell you how much they're spending, how much money they're losing. Think of it as a startup that they've created with a huge amount of venture capital investment. And say, look, we're making the bet on what we think is going to be in the growth space, like a venture capitalist. We can afford to do that because we have the capital to

• 18:37Aswath Damodaran?

  do it. But like most venture capitalists, we're venturing into the unknown. And they think markets will punish them for being honest. But I really think markets would welcome that honesty. Because I think markets increasingly, as they listen to vague answers to questions, said, these guys have no idea what's happening. You know, they don't know what's going to happen. And they're trying to act like they know more than they do, when in fact, they don't. It's better to be seen as trying to find an answer than acting like you have the answer, but you're not willing to give the answer to markets. So I think more transparency would be good for these companies, but I'm not sure they will take my advice on that.

• 19:18Ed Elson?

  It seems that the lack of transparency and the unwillingness to answer the question, to your point, it makes me more anxious. It makes me think that they're not telling us something because if they tell us the truth, then the business models don't work anymore. And there's one piece of data that I'd love to get your reactions to. Something we, I'd love to know the answer to is what share of their AI revenues are coming from OpenAI and Anthropic, two very, very big companies whose financials we know to be shaky at best because they're highly unprofitable companies. We don't know the answer to that question fully because they haven't told us, but there have been some estimates from

• 19:59Ed Elson?

  some Wall Street research. Barclays estimates that OpenAI and Anthropic make up 73% of Amazon's AI revenue. Wells Fargo thinks that OpenAI and Anthropic make up 74% of Microsoft's AI revenue. UBS had an estimate for Google as well. I mean, the point being highly reliant. How big of a problem is that, if all of that is true?

• 20:22Aswath Damodaran?

  It is a big problem because almost all of the revenue you're talking about is intra-company revenue, building the factory, building the architecture. It's not revenue from end users. And that's really the part that we're uncertain about, right? I mean, you can keep spending more money on the factories. Nvidia sells chips and you pay for the, I mean, the intra-company revenue just reflects the fact that collectively you're building the biggest architecture businesses ever know. But to do what? If people are not buying your end product and services, what difference does it make that you generated revenue from each other? So I think that it would be useful to actually get a sense of that end revenue.

• 21:06Aswath Damodaran?

  That's the part we're all seeking out is Anthropic might be the one company that you can talk about end revenues because the L L Ms and what they generate. But it's a fraction of what you think of as total revenue from A I. And it's a small fraction. And for this to be a healthy business, that's got to be the driver. The architecture can't be eighty percent of your revenues. In a healthy business, the architecture has got to be ten, fifteen, twenty percent of your revenues. The rest has to come from end customers. End customers can be businesses, they can be individuals. But that's not what we're seeing right now in the A I space. And we're not getting a sense of whether that's building or not,

• 21:48Aswath Damodaran?

  other than through anecdotal evidence, which is the worst kind of evidence we can get of. Somebody saying, I use Claude and I save three hundred million dollars. Hey, that's great, but what does it tell me about collective revenues? And three hundred million dollars is a drop in the bucket when you're spending hundreds of billions in building this architecture. So I think more transparency all the way around would be helpful here. Because, and I speak as somebody who's an optimist on A I product. I think that there is a market out there. It's going to be a big market. But I don't, I'm not getting any sense of clarity on that market from all of these companies reporting on that space. And I wish I had more clarity.

• 22:32Aswath Damodaran?

  And I think, you know, the Palantir earnings are in a sense one. It's one of the few companies that can actually say, look, we're making money on selling stuff to people with A I built into it, rather than selling to other companies, building more of the A I architecture. So I think that that's the place where I'm looking for more clarity is that end user revenue. And I'm not getting that from any of these companies yet.

• 22:59Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend. And please follow us on YouTube, Spotify, or wherever you get your podcasts.

• 23:17Speaker 00

  This episode is brought to you by Michelob Ultra. Good times mean competitions between you and your friends, like seeing who can throw some pigskin the farthest or rush the field the fastest. Winner gets an ultra. Because it's not just a superior like beer. It's also giving fans superior access to their favorite sporting events. Superior is worth playing for. Visit michelobultra.com/superioraccess to enter. Enjoy responsibly. Copyright twenty twenty six Anheuser Busch InBev Michelob Ultra Beer, St. Louis, Missouri.

• 23:46Speaker 01

  The new LinkedIn Hiring Pro can't undo your last hire, the no show. Who set you back because they didn't show up on day one or day two or ever again? And now your product launch is delayed because you're talking to alien abduction podcasters to track them down. But LinkedIn Hiring Pro can help make sure your next hire sticks. In fact, businesses who use LinkedIn are twenty four percent less likely to reopen a role in the next twelve months. Hire right the first time with LinkedIn Hiring Pro. Post a free job today at LinkedIn.com/quality.

• 24:16Speaker 02

  Chronic migraine is fifteen or more headache days a month, each lasting four hours or more.

• 24:20Speaker 03

  Botox on botulinum toxin A prevents headaches in adults with chronic migraine before they start. It's not for those with fourteen or fewer headache days a month. It prevents on average eight to nine headache days a month versus six to seven for placebo.

• 24:33Speaker 04

  Prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection, causing serious symptoms. Alert your doctor right away as difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life threatening condition. Patients with these conditions before injection are at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Allergic reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions, including A L S Lou Gehrig's disease, myasthenia gravis or Lambert Eaton syndrome, and medications, including botulinum toxins, as these may increase the risk of serious side effects.

• 25:10Speaker 01

  Why wait? Ask your doctor, visit botoxchronicmigraine.com or call one eight hundred four four Botox to learn more.

• 25:21Ed Elson?

  We're back with Prof G Markets. It seems as though these big tech companies were looking for a growth engine. They saw A I happen. They invested huge amounts of money into basically two companies, OpenAI and Anthropic. Then OpenAI and Anthropic turned around and sent the money back to them, buying all of the compute from the data centers that they're building. And that is now how they grow. And that's what we're seeing when the numbers explode. That to me signals something very unhealthy that we are. And I thought about you a lot when I was looking at these earnings, the idea of the mature company versus the young company.

• 26:05Ed Elson?

  And it seems as though these companies are trying to sort of artificially inject this Botox into themselves to pretend that they're young again. Is that not what's kind of happening here with big tech?

• 26:17Aswath Damodaran?

  They are middle aged companies. And I've been saying that for a while for the Mag Seven. Middle age is not bad. They're in great shape. They make a lot of money. They're good middle aged companies. But you're right, nobody wants to be a middle aged company, especially these companies with a history of growth. And there are two things that drove them to AI. One, of course, is greed, the fact that there's a big market and they can find growth there. But I think you can't underestimate the fear factor, the fear of being left behind of history books saying, Alphabet got into A I, but Meta was slow to join in. You can almost see that playing in the way they talk and the way they invest is they don't want to be pointed to as the company that's not keeping up with everybody else.

• 27:00Aswath Damodaran?

  There's an element of the emperor's new clothes here, right? Which is, you know, we talk about A I, it's going to be a big market. We all buy into it and they kind of hang out with the crowd where this is accepted wisdom. You know, the conviction that A I is going to be a huge market is deeply embedded. You know, and I think when that's deeply embedded, you don't want to be the company or the C E O of the company. And I put it right to the top here, the C E O of the company that falls behind. And I think that's a big part of what you're seeing in this race to spending is not that there is a belief that they're going to make money, but the worry that they will be left behind in this race and be the company that didn't catch that race.

• 27:44Aswath Damodaran?

  I mean, the, we often learn the wrong lessons from looking at history. A lot of chip companies look at Nvidia and they said, if only we'd been like Nvidia, think of how much money we could have made in the A I chip business or. And I think that the Nvidia lesson for a lot of companies is if you bet big on a growth business and it works out, you're going to be this insanely valuable company. But that's betting, that's not investing. You can't run a company betting on the odds that you have right now. And collectively, that's why I think they're going to, collectively, I think they're over investing. I don't think, even think there's a question.

• 28:27Aswath Damodaran?

  The question is whether there'll be one big win and lots of big losers or how big the losers will be or how this business will shake out. With the worry that somebody outside the space who didn't invest like they did could be a late entrant into the space, but because, you know, it's like, you know, every time I take the train from San Diego to L A, I curse the fact that U S railroads were built a hundred years before everybody else. Because they were built for trains that could go only twenty five miles an hour. And by the time you got around to putting faster speed, you couldn't take. My worry is you're building A I architecture and you might find out three years from now

• 29:09Aswath Damodaran?

  that you've been building for the wrong kind of product and service. And that's the charitable view you can take of Apple is they have the money to spend if they wanted to. And maybe they'd rather wait for this turmoil to clear up and people to find that end game before they jump in with tens of billions. But I think, I mean, uneasy is the word I would use. Worried might be, you know, might be the follow up to that. But I'm uneasy about the way they're spending money. And if somebody owns five of the Mag Seven, I don't own Nvidia anymore or Tesla anymore. I see the intra company both investing and financing. That's the other side of this, right?

• 29:51Aswath Damodaran?

  In addition to the intra company operations, there's intra company financing with Nvidia often financing customers who buy from them. And intra company investing, something that when I, when I first started valuing companies, I used to be happy to be able to value U S companies because cross holdings were not common here. I hated valuing family group companies in Asia because to value one company, I had to value four companies. I worry about the fact that to value any of these companies in the near future, I'll have to value three companies. So to value Microsoft, I'll have to value OpenAI because of the big position it has. So the intra company investing, financing and operations creates noise in the process.

• 30:35Aswath Damodaran?

  And noise is just a fancy word for, we don't know what's going on under the surface because of the intra company stuff.

• 30:42Ed Elson?

  On this point, when we look at the net income for Amazon and Google, both of which exploded, almost tripled in Amazon's case, eighty five percent of its net income, Amazon's, was attributable to its paper gains, its unrealized gains in their stake in Anthropic and OpenAI. And for Google, looking at their stakes in SpaceX and Anthropic, that number was eighty seven percent. So their earnings have been massively inflated by these gains in these A I startups, which they haven't even actually realized. So we didn't even know if those valuations are fair or even make sense. We don't know how they were valued either. And this is something I pointed out on, on Twitter recently.

• 31:26Ed Elson?

  As a result, their P E multiples have been massively skewed. They've come way, way down, somewhere below twenty times earnings because their earnings have exploded. And I worry that that means that the metric has been compromised by A I because it looks cheap, but you're not getting the full story. We made like our own little adjustment where we kind of stripped out the A I startup gains. And you pointed out that actually we need to be including their value in the numerator. Could you talk a little bit about what, how we can actually value these companies now that they're so in bed with the A I frontier labs?

• 32:01Aswath Damodaran?

  When I talk about pricing metrics in class, P E, E V to EBITDA, E V to sales, I mean, the whole, there are dozens of multiples. One of the first rules I start with is a consistency rule, which is what's in your numerator should be what's in your denominator. So let me give you an example, you know, enterprise value to EBITDA widely used in capital intensive businesses. What's in the numerator is the market value of equity and that net of cash. And people say, why do we net cash out? Because the income from cash is not part of EBITDA. And then I point to a danger with EBITDA when you have cross holdings. When you have cross holdings, here's the problem. If you have minority holdings in other companies, your market value reflects those holdings.

• 32:45Aswath Damodaran?

  Because the market knows you own thirty percent of this very valuable company. So what happens is your market cap inflates, your enterprise value is higher, but your EBITDA does not include the earnings from that cross holding because it's viewed as a non, it's viewed as non operating. It shows up below the EBITDA line. So I say with, even with enterprise value to EBITDA, you should be netting out the value of the cross holdings because otherwise you inflate the, you think that these companies are more expensive than they are because the EV is inflated by including them, but the EBITDA doesn't include it. And people say, that's a pain in the neck. And I say, welcome to reality. A lot of the reason people like to use multiples is the shortcut, right?

• 33:29Aswath Damodaran?

  You're not asking the in-depth questions you need to ask to value a company. So I need a shortcut. And that shortcut historically has been the P E ratio. But for twenty years, I've argued the P E ratio is the most dangerous of all multiples to use because it's this mess, right? There's a numerator that's just the market value of equity and a denominator includes everything. It includes interest income from cash. What if you're making a huge interest income from cash? And you're including it and that's part of your denominator. You're mixing up a business with a cash holding and in this case, a cross holding and you're trying to come up with a consolidated multiple.

• 34:10Aswath Damodaran?

  So the lesson I think that you get by looking at the Google and the alphabet is don't trust net income. Net income is a deadly number at these companies because of the mess that goes into it. Cry the income statement, look at the operating margins, look at the interest expense. And because in a sense, you worry about things like financial expenses and other income, but separate the two. The operating income is going to tell you what the operating business of these companies are doing. The rest of the stuff is telling you what the other investments are. Now, I'm surprised to see the marking up. I mean, because on the Amazon income statement, it says gain from sale of asset as opposed to the marking up component.

• 34:55Aswath Damodaran?

  The reason I'm surprised is trick, when you hold an investment for trading, you have to show the marking up or marking down. Softbank is a classic example. When you hold an investment as a strategic investment, as an investment that's going to be part of your business in the long term, you generally don't do that, right? You hold at original value and any income you show will be the actual income or loss from that holding.

• 35:20Ed Elson?

  That's what happened with Microsoft.

• 35:21Aswath Damodaran?

  So I am confused about what the accounting is. And if the accounting is they're holding it, these companies as trading investments, that's a very revealing statement. Because you told me this investment in OpenAI was because you wanted to build the AI business in the long term, not because you wanted to make money like a venture capitalist by buying OpenAI at a low price and selling at a high price. So again, it goes back to this, once you create cross holdings, you create these follow up questions. What's the motive? Why are you doing it? And I think that's what I mean about transparency. Tell me what the end game here is. What is it that you're hoping to get from an Anthropic investment? Or an OpenAI investment? And frame it in terms of that end business.

• 36:06Aswath Damodaran?

  That this will give you an advantage on that AI product and service business. I'm willing to listen. But don't tell me you're doing it because you want to make money because you're not a trader. You shouldn't be doing this if your objective is to just make money on another player in the AI space.

• 36:22Ed Elson?

  But if all of Wall Street were as rigorous as you, then maybe we'd be okay. But I think the trouble is that people like shortcuts. People don't want to do all of the homework that you're describing. So they, they just look at the numbers, they go, oh, it's okay. The revenue exploded, the net income is up.

• 36:37Aswath Damodaran?

  I don't think it's, it's, it's rigor particularly that, that keeps it apart. It's the fact that you're required as an analyst to react in real time. I'm glad that I'm not there at four thirty after an earnings call where somebody says, what do you think about that earnings call? I mean, I need a little time to digest what's in that statement. I need to look at the footnotes, I need to see the breakdown. But I think we live in a world where instantaneous reaction is required of us. It's part of your job. So I cut them some slack on what they're doing, but I faith that eventually markets kind of figure it out. And I think that that's going to be the end game is, no, I did strip out the Google and the

• 37:22Aswath Damodaran?

  the Amazon earnings from the, the effect on earnings. And they had pretty good quarters even without it. And I think it made more sense for them to say, this is what we did without our AI. And that's what I meant about separating what's happening with AI from everything else is, I don't think markets would punish them if they did that. I think markets would actually reward them for transparency. I mean, it's one of the reasons I think Jeff Bezos was cut so much slack by the market for so long at Amazon. Because he was open about what he was doing. He said, look, I'm building, I mean, I call it the field of dreams story, which is if we build it, they will come. He was open about the fact that Amazon in its early years was building revenues

• 38:07Aswath Damodaran?

  and its margins would look terrible, that they'd give away shipping for free because they had an end game. He brought people into the end game. And it's that belief that allowed Amazon to do what it did. So that's why I said if there's one company in this mix that should have experience having gone through this before, it's Amazon. So I'm going to get my cues on whether Amazon starts to become transparent earlier than, than the rest because I would expect them to.

• 38:37Scott Galloway?

  So there has never been this level of capex in emerging technology that didn't ultimately result in a fairly serious correction, if not a crash. Whether it's the railroads, the electric grid, you know, the highways, whatever, the, the, you know, steel in the ground, infrastructure in ninety nine, whatever, you know, there's always a correction. And also, to be fair, the technology and many of the companies survive that correction and go on to be big winners. But the thing that gave me the sense that we might be closer to that correction moment than further is when Meta or when Zuckerberg announced they're trying to sell their compute. And the same with Musk.

• 39:21Scott Galloway?

  And my sense is that, I mean, if you look at it, the end, the beginning of the year, the narrative was around compute scarcity. And now both Musk and Zuckerberg are trying to spin it as, look at the premium we're getting for the infrastructure we built. And what I see in that is that the AI demand curve has been vastly overestimated. And now you have essentially hundreds of billions, if not trillions of dollars in capex, all going to only two sources of demand creation, OpenAI and Anthropic. It feels like we have all of a sudden pivoted from a supply crisis to potentially a demand crisis. Your thoughts?

• 40:01Aswath Damodaran?

  When I was looking at SpaceX prospectors and I noticed that they were making more money by leasing out their data centers to others, in this case Anthropic, than they were making, no, I thought it was actually at, you know, seriously at odds with the AI story they were telling in the prospectors of this huge market, twenty eight trillion. And I think in the aggregate, what you're pointing to is the fact that you're making more money by selling into the AI architecture space, and I include L L Ms in this, then from talking about AI product and services is very revealing. It tells me that you're not as confident as you claim to be, that there's going to be this huge. If you were really confident that there was going to be a huge market,

• 40:46Aswath Damodaran?

  you would want to lease the space out to who could be potential competitors in that market. So the fact that you're doing it, I think is, is, is a sign that at least for the near term, you don't have as much faith as you claim to have, that AI is going to be as big as it is going to be.

• 41:02Scott Galloway?

  I take that as one data point. And then I take the fact that the amount of tokens being consumed from Chinese L L Ms or AI infrastructure companies has, the data I've said it's gone from eight percent share in January of twenty five to somewhere above fifty percent now. It feels as if the cracks are really beginning to emerge in the whole narrative here. And that China is potentially engaging.

• 41:31Scott Galloway?

  In AI dumping, trying to do to our market what they tried to do to our steel market thirty or forty years ago and and doing in kind of twenty weeks to Silicon Valley, which Japan did to Detroit over twenty years. Am I overstating the threat of these inexpensive LLMs out of China?

• 41:50Aswath Damodaran?

  No, I think China is just ahead of the game in seeing that the AI product and service market, this mythical market we keep talking about, is going to bifurcate. There's going to be a premium component of the market, primarily business products and services, which is high margin. And there's going to be a big component of the market, which is going to be a low margin, big scale market. And China is clearly putting its stakes in saying, that market, we're going to go after because we're equipped to go after it. So I think China, in many ways, is taking a look at that end game playing out. And I think the real question is, in that end game. So let's play it out. Let's suppose the end game, the AI product and service market turns out to be, look, let's play along with AI

• 42:33Aswath Damodaran?

  optimists. Let's say it's six billion, eight billion, nine billion, even ten billion. That by itself doesn't create valuable companies, because you haven't told me much about the business models that will be used to generate money in that market. If ninety percent of that market is low margin, large scale, you could be a ten trillion dollar market. But the companies in that market are not going to make much money on those trillions of dollars, because your margins are going to be single digit margins. Now, one of the most revealing components of the Anthropic success story was how much it costs Anthropic to deliver the products and services that they charge six thousand an hour for, right?

• 43:15Aswath Damodaran?

  It's not, this isn't software, where the unit economics are amazing. The unit economics are struggling in a business that's still evolving. I think the question, though, is what's the catalyst that's going to create a major correction? This might be one of those things where you get multiple catalysts and corrections along the way, rather than a big time, you know, like the dot com bus. Unlike the dot com bus, something that happens, staggered pain. I'm not sure which is worse, to get the pain in one go and clean up and move on, or have staggered pain where individual companies get into trouble and markets go

• 43:56Aswath Damodaran?

  through these cycles of correction and hope, where you come back a little bit, then you have a correction again. But I don't see an individual catalyst that's big enough to, for a moment, where people go, oh, my God, the AI market is not going to be as lucrative as we thought it was. Because it seems like every time you get something that has the potential to do it, there's still, there's still money on the sidelines that jumps in and says, we need to be in AI, because everybody else needs to be in AI. Now, I think that, you know, last week, after the blow up with situation, when you had all that selling of forced selling, the next day you wake up and there's a ten percent jump in all of

• 44:40Aswath Damodaran?

  the stocks. Clearly, money coming in, saying, we've never been in AI, we need to be there because everybody else is there. I think I know whether, whether this is being accentuated by social media and the awareness of other people make money. I don't know. But that factor still seems to be strong enough to overcome the catalyst effect. But, you know, at some point in time, the catalyst effects are going to overwhelm that momentum effect.

• 45:09Ed Elson?

  We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

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• 47:30Ed Elson?

  We're back with Prof G Markets. Do you think that OpenAI, you mentioned the unit economics, Anthropic charging all of this money, but then they spend way more money delivering that product. Do you think that OpenAI and Anthropic ever figure out the unit economics? Like, I'm just going along with, I guess they will. But I don't know why I should believe that.

• 47:50Aswath Damodaran?

  The way AI is set up right now, I don't think there's going to be that much give on the unit economics in the near term, right? You still have to build, I mean, the physical infrastructure seems so expensive, unless you can figure out a way to build data centers at one tenth the cost, right? This is not the kind of investment where scaling up is going to help you that much. You have to figure out how, you know, so none of the elements are easily going to bend to economies of scale argument. Maybe I don't know enough about AI. Maybe they have some secret sauce that's going to allow them to do this. But I don't see it. I think every, you know, every time I open Google

• 48:31Aswath Damodaran?

  and AI helps me out there, it seems like a marginal cost is being created somewhere along the way that I'm not seeing. And that marginal cost is not decreasing because tens of millions of people are using Google at the same time, because each third seems to provide an additional cost. So, as I said, I am not enough of an expert in AI to see where these economies of scale will come from, but I don't see them yet. I don't see anything in the architecture that bends easily to scale where you can see the costs are going to decrease just because they get bigger.

• 49:06Ed Elson?

  I don't see it either. And I feel as though we're just being told to trust that it's going to work out and trust that the unit economics will make sense eventually. But if they don't, the whole thing collapses.

• 49:19Aswath Damodaran?

  On the premium side, it starts to shrink. Maybe not collapse, but shrink. McKinsey might be willing to pay nine thousand dollars or ninety thousand dollars and five hundred thousand dollars for an AI agent. There would be premium products where you can charge a premium price even over the high cost, but it'll mean that that end market is going to be more premium product. The economies of scale argument might work better in that lower margin market where you don't need Nvidia chips, you don't need expensive data centers. And, you know, the reason I say that is I see a lot of stuff that I saw ten years ago, that was labeled as machine learning, or, you know, look at this macro we built

• 50:02Aswath Damodaran?

  for Excel. I see the same stuff today marketed as AI. And my question is, why do you need any of this AI? You don't need data centers, you don't need Nvidia chips. You could do this with, with the traditional computing power and without the access to data. That's the part of AI that I think is going to be the scalable part. We have low margins, but the scale takes care of it. So it's not that the AI product and service market will not exist, but it'll become almost primarily a mass market, low margin business. And that's why the architecture you're building might not be right for that. It might be too much for the premium part of the business where you need.

• 50:45Aswath Damodaran?

  These high-end chips and data centers to feed those products.

• 50:49Ed Elson?

  We're describing a lot of AI anxiety, and as you can tell, I'm pretty anxious about this myself. How much of this anxiety, in your view, is priced in right now? I get the sense that it's somewhat priced in, certainly priced in in the case of Meta, in my view, perhaps not the others. What do you make of these valuations? Do you think that the markets are telling us that they see what we're saying?

• 51:15Aswath Damodaran?

  They seem to see it, and then they seem to forget it, right? You take the Meta example, right? In over the last week, it's made up about seventy percent of what it lost in the previous six months. So it's not like the lessons are sticking because, you know, all you seem to need is some other distraction along the way. And that's why, for the moment at least, the catalysts are not working because they have a temporary effect. One company gets hurt, but you're not seeing it ripple into the other companies. It seems to be company-specific and time-specific. So I think that collectively, I think anxiety kind of ebbs and flows,

• 51:56Aswath Damodaran?

  but it doesn't seem to be at a level where it permeates into permanent pricing changes yet. And I think maybe that reflects the fact that those who are anxious are in the wrong. So I'm always open to the possibility that maybe we're missing a really big story. Maybe Leo was right about this being the ultimate winner. It's going to happen in 2027. And I'm always going to leave that door open because I've learned that you can't ignore somebody just because you disagree with them. I have to be willing to listen. So I try my best to read as much as I can from the AI optimism. I'm looking for a story that explains economies of scale.

• 52:39Aswath Damodaran?

  But so far, the story still seems to be focused on fuzzy end games and how great an AI agent has worked in an individual business. I'm not seeing the aggregate numbers from any of these stories that lead me to say, okay, there's something here that I should be taking a closer look at. So it's going to be a race between whether those stories come into play or whether the skepticism builds up to a point where people stop believing.

• 53:05Ed Elson?

  So are you comfortable with current valuations of big tech? Microsoft, Amazon, Google, Meta, we'll leave Apple aside because they're not getting into AI. Are you comfortable with them, these valuations, or are they too volatile to even have an opinion?

• 53:18Aswath Damodaran?

  I can live with them, and it's because of my framing. I frame them based on what I paid for them. I paid for them a long time. I know this sounds irrational, but if we keep comparing the price to something, you know, that I could have got it for six months ago, a year ago. So I'm willing to accept twenty percent write-down in those investments and accept it as part of the long-term costs and benefits. Now, the reason I do it is if I think there's a shakeout in the AI space, these companies will be impacted. But the lesser companies in the space are, I mean, none of these companies have net debt ratios that are beyond the single digits. Their debt is completely manageable. And I did net-to-debt EBITDA for all of these companies, one and a half times EBITDA.

• 54:03Aswath Damodaran?

  So basically, next year, they stopped investing in AI. The year and a half of EBITDA from their regular businesses would pay off the debt. So debt is not my concern of these companies. But there are a whole host of lesser companies where debt is a much bigger component. There, an AI meltdown in the story will be catastrophic. Now, just as Amazon got hurt after the dot-com bust, but it's the best thing that happened to them because it wiped out all of their dot-com competition. In many ways, the Mag Seven might be, you know, this is a very sinister view of this whole thing. Maybe they're wishing for an AI correction. They'll be punished, but the rest of their competition will be decimated.

• 54:47Aswath Damodaran?

  Now, and remember, OpenAI and Anthropic can't survive on their cash flows either. So maybe there's a, you know, if you were, you know, if you were looking for a story with villains that knew more than they did, you could, maybe this is the end game for them. Is they're hoping for an AI shakeout where they come in and pick up the pieces at bargain basement prices? Because they're going to survive. I mean, I don't have worries about failure rates of these companies. I just worry about their prudence and what they're doing in terms of AI investing.

• 55:18Scott Galloway?

  There's been a lot of concern around, they have 1.4 billion in disclosed debt, but the debt you don't see is now bigger than the debt you can see. So, for example, Meta is carrying 420 billion of off-book versus 140 billion on-book.

• 55:39Scott Galloway?

  But I don't entirely know if that's a feature, not a bug. Are these companies taking advantage of their credibility in the marketplace to offload from their shareholders some risk? Or is it just an accounting trick to create opacity around the actual amount of debt they have?

• 55:57Aswath Damodaran?

  Now, I'd be interested to see what the recourse on that debt is. If you're lending money on a data center that Meta is a player in, and the debt has recourse only against that data center's revenues and assets, then you're not going, I mean, in a sense, as a Meta shareholder, I've, you know, it's clearly not something I want to see happen, but it's not something that's going to impact me. Now, I'd be, you know, again, I want to go back and look at the accounting rules as to what happens when you take debt that's off-balance-sheet debt, where there is recourse against the parent company

• 56:38Aswath Damodaran?

  and whether you can get away not revealing that as part of your debt. And maybe there's this iceberg of debt that you're not seeing the underneath, that could be, no. But I think that even, I mean, let's bring the recourse debt in then, and let's see. I mean, I'd like to see full disclosure of that debt that's not on the balance sheet. Because even then, I would wager it's three, three times. We're not talking about heavily levered companies in the sense of companies that are, you know, that are going to be dragged down by the failure of these, of AI. But I might be wrong on that, and maybe I need to do more of my homework digging through that debt.

• 57:20Aswath Damodaran?

  But that would require some bending, perhaps even breaking of accounting rules to be able to get away with it. So, you know, I'll do another read of the footnotes to see if there's something in there. But now, at least for me, the worry with the Mag Seven is not so much the debt, but the investment paying off, whether there's enough for return. The worry with lesser AI is whether they can make it to the other side. And their worst-case scenario is that AI turns out to be an incredibly big market, but they don't make it there. They fail because the debt comes due, and they have to sell themselves to one of these other companies at a fraction of what they should be charging.

• 58:02Aswath Damodaran?

  And that's a very real possibility in this space. And if it does happen, there's going to be serious side costs for the rest of us because debt going down is always going to create side costs.

• 58:14Ed Elson?

  Have you looked at OpenAI and Anthropic? What very little we know of their financials, and would you ever value those companies?

• 58:23Aswath Damodaran?

  I will, because I valued SpaceX with, you know, let's face it, eighty percent of SpaceX value, at least the numbers. The story was about XAI. So it's an XAI story embedded in a space launch company. So when the prospectus comes out, I plan to value them ahead of the IPO. And I'll be, it'll be interesting to see as you move from SpaceX, whether the sum of the shine has come off the story because of what's happened at SpaceX, where people have, you know, maybe the Anthropic IPO is not going to be a trillion, maybe it'll be 800 billion. Maybe OpenAI is not going to get the price it wanted. So I have a feeling that they're revisiting the story

• 59:07Aswath Damodaran?

  because what they did with XAI was too sloppy. It really didn't stick. And they need to get their, you know, and I think there you're going to look for more specifics because, no, just telling me you're a great LLM, you have amazing agents. AI agents doesn't do it for me. You need to show evidence that this is actually sticking at a business level, that you're making money. You're, there, I need to see the unit economics and evidence that there are economies of scale you can point to. This is what it cost us two years ago, a year ago this year. Because that's how you back up an economies of scale story. Just don't give me the words, show me the numbers.

• 59:45Ed Elson?

  Would you ever value OpenAI without the full story? Would you ever undertake that? Because it seems as though, and you pointed this out in our exchange on Twitter, like, we need to put the value in the numerator, but that kind of means valuing OpenAI. In order to value big tech correctly, I need to value OpenAI, but how can I value OpenAI because I know nothing about it? Would you ever try to do it anyway?

• 1:00:12Aswath Damodaran?

  Absolutely. I mean, in a sense, you all, you have no choice but to tell the full story. The question is, is it a story you're entirely making up based on clues you're getting as well, which is a very dan-, which is what I did with XAI. There was no story in the prospectus. There were just numbers thrown out of thin air. There was no story from the management of what they planned to do. So I had to write the whole story. That's always going to create more uncertainty. So it's not a question of whether you can tell a full story, but what's the basis for the story you're telling? And the case of OpenAI, unless they fill in the blanks, I am coming up with a story based on my limited understanding of AI.

• 1:00:56Aswath Damodaran?

  So I'll give you an economy of scale story that's not very strong. And I might say your costs are not, you might disagree with it. But part of the reason I think it's critical that investors flesh out their full story is then companies are forced to respond, right? So if OpenAI feels that they have true economies of scale and the story being pushed into the valuation is there are no economies of scale, the costs are not going to go down, then show me the data that you have that tells me that I'm wrong. Because as long as we let these companies get away with these diffuse total addressable markets, trust me, and you don't even tell a story, use a pricing metric and say it's okay

• 1:01:39Aswath Damodaran?

  because there's a big market out there, there's no incentive on the part of companies to tell the fuller story. So I think I will try to tell a full story, but I'll be open about the fact that much of the story is my story, based on little strands that I pulled out of different places. Some from the company, some from people who know AI a lot better than me. But I'll always tell a full story and people will take issue with me saying your story is wrong. And I say, absolutely, I know it's wrong, but what's the counter? Where is the counter narrative? You could tell me a narrative is wrong, but you have to beat it with a counter narrative. And that's good because it extracts the counter narratives from not just the company, but from other investors who disagree with me.

• 1:02:24Ed Elson?

  But it seems as though there is almost no price discovery in, in the frontier lab world at all, except for, and this is how we'll end, SpaceX, where as soon as it went public, it went up and then it came crashing way down, cut in half within a couple of months, maybe less than a month, a couple of months. Let's just get your reactions to SpaceX, what happened there?

• 1:02:52Aswath Damodaran?

  And I think in many ways, it's, you know, it, it shows you the power of hype, the power of momentum and how social media has added to that momentum factor, which is, I mean, this is the ultimate social media experiment because you think of Grok and X and basically you've got this, and social media is like riding the tiger. It's, you know, it's, it's great when you're on the back of the tiger, but sooner or later you're going to slip up and end up being its meal. So I think it shows you both the upside and the downside of social media driving prices. But I think as more numbers come out of the company, as the earnings,

• 1:03:33Aswath Damodaran?

  much as we take issue with the earnings we're seeing from the Mag7, now we extract information from it that is useful in kind of finessing our story. So once you go public, that is something that these companies will face is now in addition to telling the story, you've got numbers that come out and either your story is consistent with your own numbers or people are going to look at the inconsistency. So now I think that there are more tests coming and I think for SpaceX and these other companies as they go public, it'll be experiment worth watching. It'll show up in the market press.

• 1:04:11Scott Galloway?

  I'm fascinated with 1999 because I think it was the year Ed was born.

• 1:04:15Aswath Damodaran?

  That's true.

• 1:04:15Scott Galloway?

  But also, but also we remember that, Aswath. And I understand, you know, things are different this time in all, you know, in quotes, but it just feels eerily reminiscent. First, the B to C guys took a hit. It feels like OpenAI is under real fire around its business model right now. And then everyone said, okay, no problem. We'll go to B to B. Everyone piled into Anthropic, which had greater share in the enterprise market. Then when that didn't live up to its expectations, they started going after the infrastructure guys. It feels like we are midway through the exact same cycle with the dominoes beginning to fall. This feels, this feels more similar than not to me to the, to the 99

• 1:04:59Scott Galloway?

  and then ultimately the 2000 implosion. Where do you see the parallels or not from 99?

• 1:05:07Aswath Damodaran?

  No two corrections ever work out the same way. So I mean, I, you know, part of me doesn't want to see a correction because of what it'll do to any, every portfolio in the US. But part of me just, you know, from a market observer's standpoint, I am interested and I'm much more aware now than I was in 2001 of the catalysts that created. Because in 2001, if you remember, it wasn't a single catalyst. It was just a collection of small things happening. Now, as you said, you know, not even dominoes falling, but trees falling in the forest. And eventually you wake up and say, oh my God, half the forest is gone. So, you know, I'm keeping tabs as I can, you know,

• 1:05:51Aswath Damodaran?

  whether it's on the investor's side, where you see a meltdown of a hedge fund shutting down because it made too much of a bet in AI, or on the company's side, where you see companies stepping back from the brink and saying, we screwed up. We're going to write off that. Now, we still haven't seen a major AI capex write off from a company yet. Because that'd be the ultimate admission of, hey, guys, we screwed up. We've admitted we screwed up and we're not going to do this anymore, right? Whether that'll happen after the correction or before the correction or whether it'll trigger the correction. So I keep my eyes on accounting revisions and, you know,

• 1:06:33Aswath Damodaran?

  restructuring charges and look at what's being written off. Because that might start to give us as an indication of, you know, of how this correction will play out.

• 1:06:44Ed Elson?

  Aswath Damodaran is the Kershter Family Chair in Finance, Education and Professor of Finance at NYU's Stern School of Business, where he teaches corporate finance and valuation. You can read his research on his blog, Musings on Markets. Aswath, thank you so much for joining us today. And to our live audience, thank you for tuning in. We will see you next time.

• 1:07:06Scott Galloway?

  Thanks, Aswath.

• 1:07:07Aswath Damodaran?

  Thank you.

• 1:07:10Ed Elson?

  This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carti. Our research team is Dan Shalun, Kristin O'Donoghue and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof you Markets from Prof you Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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