Aswath Damodaran, a finance professor at New York University, warned investors to monitor smaller companies during upcoming AI-related market shakeouts [1].
This warning comes as the equity market grapples with the sustainability of artificial intelligence valuations. While large "hyperscalers" possess significant resources, smaller firms may lack the capital or market position to survive a correction driven by cooling hype [1].
Speaking on CNBC Television’s "Closing Bell" program in New York, Damodaran discussed the current appetite for AI and the specific risks facing the hyperscaler segment of the market [1]. He said that the rapid rise of AI expectations creates a precarious environment for companies that cannot deliver immediate, scalable returns [1].
Damodaran said that the market often overestimates the speed of adoption and the breadth of profitability for new technologies. This discrepancy typically leads to a shakeout period where the strongest players survive and the weaker ones fail [1].
"Watch for the lesser companies when the AI shakeouts happen," Damodaran said [1].
He said that the impact of these corrections will be more noticeable among smaller firms than among the dominant tech giants. These smaller entities often rely on the momentum of the broader AI trend to attract investment, making them more vulnerable when the market demands concrete financial results over speculative potential [1].
“Watch for the lesser companies when the AI shakeouts happen.”
The warning highlights a transition in the AI investment cycle from speculative growth to fundamental valuation. While the largest tech companies—the hyperscalers—have diversified revenue streams to buffer against a downturn, smaller AI-dependent firms are more exposed. If the 'shakeout' occurs, it suggests a consolidation phase where only companies with sustainable business models and genuine utility will survive, potentially leading to significant volatility in small-cap tech stocks.
