Aswath Damodaran, professor of finance, NYU Stern School of Business Image: Alexander Tamargo/Getty Images for Vox Media
Every company wants to ride the artificial intelligence (AI) wave one way or the other. There is a fear of missing out in the investing community also. Money managers are betting big on the theme and how it will generate multi-bagger investment opportunities in the coming years. But what about the potential downside?
Aswath Damodaran, a veteran investor, popularly known as the dean of valuation, says that unlike the metaverse, or the cloud business, AI has the potential to change the way we live and work. But he is sceptical about how most companies will benefit: “I'll predict you're going to find maybe a handful of winners, a lot of wannabes, companies that tried to get on but never quite made it, but I'll also make the prediction, for most of them, the payoff is going to be negative.”
Damodaran, professor of finance, NYU Stern School of Business, explains why, in part four of a multi-part series, from an interview on Forbes India Pathbreakers
in August. Edited excerpts:
AI: ‘Mood at the moment’
I think in a sense it is true that AI is the mood at the moment. And I do believe that AI has the capacity to change the way we live. I mean, one of the questions I ask about these buzzwords when they show up is, is this a word that can change the way we live? I didn't feel that about the metaverse. When I thought about the metaverse, I thought about 25-year-olds with virtual reality glasses, and I could not relate.
I did not feel that way about the cloud business. During my lifetime, the big changes that changed the way we live and work, the first was personal computers in the 1980s. The second was the internet in the 1990s and following through. The third was social media. With each of these recognised, it wasn't just businesses, it changed the way we lived, it changed the way we all work. I think AI has the potential to change the way we live and work. So that's the good news.
The three big trends: ‘Few big winners’
The bad news is if you take those three big trends I talked about, PCs, the dot-com boom, or the internet and social media, and you think about who were the winners that came out of this game. First, remember there are relatively few winners from this game. So, if you look at the PC business, almost none of the original PC companies ended up as winners. Dell, Compaq, all faded away. In fact, the biggest winner from the PC business is a company that supplies software to PCs, which is Microsoft.
You look at online, the big winner, of course, is Amazon. But there were companies that provided the infrastructure for the online revolution. Cisco, it peaked in 2000 and then it kind of faded down to becoming a large and successful company. The big winners of social media have been Facebook, Google. So, you can see that each of these big movements has created a few big winners.
So I can understand why mutual funds and investors are excited. They want to find the next big winner. But here's the thing that needs to be kept in mind. Most of the rest of the world did not gain or become more profitable. Take the internet, it destroyed a lot of businesses, it had a few big winners, but the rest of the world actually emerged as less profitable because of the dot-com retailing revolution. Also read: Zomato to venture capital to emerging markets, valuation guru Aswath Damodaran busts the hype
AI bandwagon: ‘Most companies will end up spending money’
I'll make the same prediction about AI; AI will create some winners. Nvidia right now has been anointed as one of the winners, Microsoft has been anointed as one of the winners, and maybe they will end up as the winners when this game is played through. But the rest of the world, I don't see how this is going to make a retail business or a grocery business more profitable. Kroger's, which is a grocery chain, in the last earnings report talked about AI eight times during an earnings call. I failed to see how bringing AI into the grocery business is going to make it more profitable.
Everybody wants to be on the bandwagon. That's what I mean by wannabes, companies that will jump on the bandwagon because they think it's the thing to do. Most of them will end up spending money, they will pay a lot of consultants, a lot of advisors, for these AI tools. But they'll have nothing to show for it. A lot of people are going get rich on AI, right? But they're going to be consultants, advisors, suppliers of services that'll make, that they will claim will make you better. But if everybody pays for that service, guess what? Nothing will set you apart.
The payoff: ‘Negative for most companies’
I know there are stories about how to reduce cost, but as I was saying, if everybody has it, nobody has it. If every grocery chain has AI, guess what's going to happen? Costs are going to come down across the board, but so will prices, and so will margins. So, 10 years from now, when we look back at AI, even if it succeeded as a major movement, I'll predict you're going to find maybe a handful of winners, a lot of wannabes, companies that tried to get on but never quite made it.
And the rest of the world is going to look back and say, what the heck did we do? I mean, this wasn't the unalloyed good that we were sold. Because every one of these movements has created side costs for society that we’re still dealing with. So, you can predict because you've seen it happen with the other booms. It is predictable. I understand why companies will do it, but I'll also make the prediction for most of them, the payoff is going to be negative.