NYU Professor Says Watch Smaller AI Stocks When The Shakeout Hits

Aswath Damodaran, known as Wall Street's Dean of Valuation, says the next AI shakeout will hit smaller companies hardest. He says the Magnificent Seven have the cash flow and balance sheet strength to survive it.

In a new interview, Damodaran pointed to falling returns on invested AI capital at Meta, Alphabet, and Microsoft. He called the drop remarkable given the companies' size.

Small AI Names Carry More Risk

The Magnificent Seven, Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, and Tesla, have spent tens of billions on AI infrastructure. Damodaran says their cash flow and debt capacity keep them out of trouble.

Smaller, less capitalized AI firms lack that same cushion, he warns. He points to the Situational Awareness hedge fund collapse as a sign of how quickly AI sentiment can shift.

"So I think when you see a shakeout in the AI space, it's not so much the Mag-7 we should be watching, but the lesser companies."

– Aswath Damodaran, NYU Stern School of Business

Falling Returns on AI Investment

The concern goes beyond mood. Damodaran tracks marginal return on invested capital, or income gained per new dollar of capex.

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