Everyone is waiting for when the major AI spending would start bearing fruit. But Aswath Damodaran, the NYU Stern finance professor known as the “Dean of Valuation,” is raising alarm bells and thinks the ROI may not return soon and may not reach the levels many expect. During a program on CNBC, he specifically mentioned Meta (NASDAQ:META), Alphabet (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT).
Damodaran’s main concern is returns on capital. Damodaran said he looked at the marginal return on invested capital across the Mag Five, excluding Tesla and Nvidia. He measured the change in operating income against the change in invested capital for the three companies. The drop-off, he said, is “pretty amazing given how big these companies are.”
Market Already Hit ‘Peak AI’
Here’s the problem. These companies are spending tens of billions on AI CapEx, and they’re not slowing down. Unless the earnings start matching that spending, he warned, a very different kind of company emerges from the mix — more capital-intensive, with lower returns on invested capital. There’s nothing inherently wrong with that, but he thinks investors in these names aren’t used to the risks of owning a heavier, lower-return business.
On the AI space overall, Damodaran believes the market hit “peak AI” a few months ago, and he expects more consolidation and correction ahead. He sees the recent post-earnings pop as a sign of how badly investors want exposure.
Aswath Damodaran
Is Damodaran right?
Bulls have a lot to say on Damodaran’s worries, at least when it comes to GOOG. Google Cloud revenue jumped 82% year over year, accelerating from 63% the prior quarter, and cloud operating margin more than doubled to 35.6% from 20.7% a year earlier.
The key: the margin expanded while growth accelerated, so the growth wasn’t bought with discounts. The backlog hit $514 billion, up from $106 billion a year ago, and management expects to convert over half of it within 24 months. So on the demand side, the return is showing up: the capacity being built is largely pre-sold.
But Damodaran’s cash-flow concern is real too. CapEx doubled to $44.9 billion in the quarter, and Alphabet posted its first-ever negative free cash flow at -$5.9 billion. Management raised 2026 CapEx guidance to $195-205 billion and signaled a bigger 2027. Long-term debt ballooned toward $98 billion.
Microsoft
Microsoft’s latest results paint a similar picture. Azure grew 43%, accelerating from 40% the prior quarter and beating the company’s own 39-40% guidance. Total revenue rose 18% to $90 billion, and the commercial backlog (remaining performance obligations) hit $678 billion, up 84% year over year. Like Alphabet, the spending is translating into faster growth, not just capacity sitting idle — management stressed demand still exceeds supply. The return signal is that Microsoft is getting better at monetizing the spend, cutting the time to bring new GPUs online by nearly half.
