Aswath Damodaran (NYU) | Private Credit Is the Biggest Loser When AI Corrects | #15

The intersection of credit and equity investing reveals a systemic "big market delusion" where AI companies are priced based on speculative narratives rather than fundamental business economics. NYU Stern professor Aswath Damodaran argues that overconfident entrepreneurs and investors drive this collective overvaluation, ignoring the reality that AI’s total addressable market is constrained by actual labor replacement potential. Furthermore, young companies frequently destroy value by over-leveraging, as debt creates a dangerous "debt spiral" that threatens future growth. Investors often confuse pricing—using comparable multiples—with valuation, which requires a rigorous assessment of cash flows and survival probability. Ultimately, lenders in these sectors face asymmetric risks, often acting as "sheep" by ignoring the lack of upside potential while assuming the downside of risky, capital-intensive projects that lack the cash flows necessary to service debt.