Big Tech's AI Bet: $745 Billion Questioned as Returns Unclear

Aswath Damodaran, a renowned finance expert and NYU Stern professor known as the 'Dean of Valuation,' has expressed concern over the massive investments being made by Big Tech companies in artificial intelligence (AI).

The four tech giants - Amazon, Meta, Google, and Microsoft - are collectively planning to spend up to $745 billion on capital expenditures this year, with AI infrastructure driving a significant portion of the increase. Damodaran argues that while these companies can afford such large investments, their lack of clarity on a clear business model for AI is a major concern.

According to Damodaran, the companies' past returns on invested capital have been significantly lower due to increased spending in AI. He compares them to manufacturing companies, which requires answering whether the return on investment exceeds its cost. Amazon and Microsoft's strong sales growth in AI-related areas do not address this question, as Damodaran is skeptical about the long-term viability of these investments.

Despite some concerns, traders on Polymarket are optimistic about the AI industry, with only a 15% chance of an industry downturn by December 31. Damodaran owns shares in five of the 'Magnificent Seven' companies and believes their valuations are manageable, but he remains worried about the prudence of these investments.