As global tech companies spend trillions of dollars to take the lead in the artificial intelligence (AI) race and invest what is considered to be one of the biggest technology investments in history, Aswath Damodaran, the NYU Stern professor, is predicting that a future AI correction could come and could pose risks far greater than those witnessed during the dot-com crash.
Damodaran on dot-com boom and bust vs AI boom
Damodaran, who is also widely known as the “Dean of Valuation”, recently explained the difference between the dot-com boom and bust and the AI boom. The Dean of Valuation believes the biggest difference between the internet boom of the 1990s and today’s artificial intelligence surge is not just the size of the investments being made but also how those investments are being financed. He noted that while the dot-com era was built around software ideas and internet businesses, the current AI race also involves massive infrastructure and billions of dollars in capital commitments.
How was the dot-com crash different?
Damodaran made these remarks in an interview that was shared on X. He noted, “The dot-com boom and bust had no huge capital expenditure in that cycle. In fact, there was very little traditional CapEx, or even R&D, driving it. People started apps. They basically started going on it.”
Elaborating further, he said, “This has been the biggest infrastructure run-up I think I’ve ever seen in business. You can go back and compare it to the automobile business 100 years ago. The amount of money that’s being put into AI CapEx is immense, which means that when the correction comes, the pain will be more intense.”
When the dot-com bubble collapsed in 2000-01, technology stocks lost billions of dollars in market value, and many internet companies disappeared. Additionally, investors incurred massive losses, with many losing roughly 70-90 per cent of their money. However, the damage was largely borne by shareholders and equity investors, which left banks and ordinary businesses out of the direct line of fire.
AI capex boom is immense: Damodaran
Underscoring the problem with the AI capex boom, Damodaran said that it is not just immense, but most of it is also funded by debt, which is coming from private capital rather than banks. He added, “There’s a very real chance that if there’s a correction and companies start having problems, that problem is going to show up as distress and default, and that really doesn’t stay restricted. It spills over into the rest of society.”
He further noted, “I’m not saying it’s going to be 2008, but 2008 is an example of what happens when lenders overreach, when they lend money at too low a rate, and the correction comes. The pain spills over.”
“So that is my concern with this big market illusion: the potential societal cost of having to deal with debt coming due that you’re unable to pay. It’s much more painful than your share price dropping 90 per cent and you feeling the pain.”
According to Damodaran, while there is no certainty that there will be a bust similar to that of the dot-com era, “history suggests there will be a bust.”
As AI investment reaches unprecedented levels, Damodaran warns that the next correction could extend far beyond Wall Street and spill into the broader economy.
