Transcription
Aswath Damodaran is often known as the valuation guru and rarely speaks to Indian media, which is why I'm so excited for this interview. He's one of the most respected voices in the financial world globally, a professor at the NYU Stern School of Business, and someone who speaks very clearly about what is going round in the world. Right now, he's gone viral for talking about what he thinks SpaceX should actually be valued at. With that, let me welcome Aswath Damodaran on the show, and thank you for giving us time on this interview.
Aswath, my first question to you is around those valuations, and I'll come to SpaceX specifically, but are there very real concerns about valuations right now with large AI plays around the world?
Yeah, I mean, people are seeing it, but remember, markets are driven by consensus, it's not by what any individual, no matter how credential, thinks about the market. And the consensus view is there are concerns, but there is potential, and for the moment, potential is winning out over concern.
All right, so then let me put it this way. Is the euphoria you're seeing right now reminding you of the dot com boom that you have looked at so closely? Are you seeing elements of that?
No, I don't. I mean, I think that is one of the most wasted exercises in markets is to keep looking backwards and trying to recreate what you saw and I mean, it's an exercise that old people play, which lets them think they have an advantage over younger people. I was around in the dot com boom, so I've seen it happen. Markets never repeat themselves. So, you got not things that play out over time. There are some common features that play out. But I I know, I generally don't look back and say, "This looks like the dot com boom. This I mean, there are elements of it that will always show up in any boom. But for me, it's always about looking forward and I think the concerns here are valuation concerns. Ultimately, everything is a valuation concern. Because ultimately, valuation is about, you know, what's your revenue growth going to be, how profitable are you going to be, and how much will you have to reinvest? And every single concern can be framed in one of those three questions.
As well, let's talk about SpaceX specifically. The euphoria that we saw was some part of it about the cult of Elon Musk.
That's part of it, but Musk is a mixed story now. There are people who will not buy SpaceX because Musk runs it. So, the net effect of Musk is not necessarily a huge boost in the stock price because there are just as many people who will not invest in SpaceX because of Musk as there are people who will invest in it. I think the reality is SpaceX is the If you are creating a futuristic company in a movie, you know, think Avengers, right? Stark Industries. You know, you you would create a company like SpaceX. This is not a tech company that makes software or apps. This is a company that actually does engineering. I mean, they create engineering marvels, getting you know, satellites into space at half the cost of anybody else. Delivery I mean, right now they're delivering internet service to Venezuela where no nobody has broadband connection. And to the extent that Grok plays with Gemini and OpenAI and and Anthropic in that market, it's potentially another big market. So, there's a real story here, and I think this and I think part of the problem is because people are in two separate camps with Musk. Either he's the greatest entrepreneur ever or he's a scam artist. They're incapable of seeing the middle ground. And there is a middle ground here. This is an amazing company. After all, I've attached a valuation of 1.3 trillion for a company with 20 billion revenues. That requires a lot of story, a lot of potential, and a lot of stuff to come true. So, you can have a great company that's not a great investment. Now, let's separate the two. SpaceX is an amazing company. It's a company that only Elon Musk could have created in many ways. But, at the same time, at 1.8 trillion, I thought it was overpriced. It's now over 1.8 trillion. So, it's a great company that the where the price is not right for the moment. But, that could change.
So, so for those who are invested in SpaceX directly, indirectly, they just have to wait it out till the valuations catch up.
It depends on whether you're an investor or a trader. 95% of people in markets are not investors, they're traders. And the difference is the following. If you're an investor, you value something and you buy it at a price lower than that value. If you're a trader, you buy at a low price, you sell at a higher price. It's a much simpler, many ways a much more honest game. You're not drawing, you know, doing these dances with intrinsic valuation. You say, "I don't care. As long as the mood and momentum are in my favor, if I buy at 200 and sell at 225, I'm going to make money." And I respect that point of view. And many people, I think, have to look in the mirror and ask themselves, "Am I an investor or am I a trader?" If you're an investor, then you have to do your own valuation. You can't go off my valuation, that's my valuation, my story, my investment decision. Investors have to take ownership decisions. They can't listen on CNBC to somebody telling them that SpaceX is worth 1.8 trillion and go out and just buy the company because somebody told them so. That's not investing. That's just following the herd. Trading, it's all about mood and momentum. There are lots of people who will get rich on SpaceX by buying at the right price and selling at the right price. It's all about timing. There'll be just as many traders [clears throat] who will lose money on SpaceX because the timing is off. So, if you, you know, be honest with yourself about the game you came to play and once you made the decision, then you can decide whether SpaceX is the right trade for you if you're a trader or the right investment for you if you're an investor.
You know, right now everything AI is gold and everything which is not AI is just been discarded or ignored. Do you think there is a real justifiable reason for all of this excitement around AI?
I think it's an easy hook for both journalists and market experts to use that this is the market entirely driven by AI. That is absolutely not true. I mean, intuitively you might feel that is the case, but you know what? If you took the AI companies out of the market, markets are still trading at multiples of earnings that were higher than they were before AI came on. So, there are there companies that are benefiting from AI? Absolutely. But, this is not a market that's being carried forward by AI and AI alone. There's a much bigger spectrum of companies. But, one of the most interesting phenomenon is in the last 2 months, the AI trade has actually turned sour for the most part. You look at Nvidia, you look at the Mag 7, and the most amazing thing is markets have held their own. That tells you that markets are, you know, there's a much bigger breadth to markets than people accept, but it's become this lazy way of saying markets are high because of AI. And I think whenever I hear that, I say you've not dug into the data well enough to be able to then follow up on that statement. So, I think that AI is helping markets, but the degree to which it's carrying markets has been overstated.
Point point taken, Aswath, and I'll take that one for the team on behalf of all journalists, but let me contextualize my question. In the Indian context, for example, FIIs are leaving. They are, though, investing in other emerging markets, including Korea and Taiwan. And what we hear constantly is because India does not have an AI play.
Now, but let's step back. Did South Korea win AI trade? The only reason they benefit is they make chips that feed into AI architecture. So, they're almost, you know, accidental beneficiaries of the AI trade. They don't develop They haven't developed an LLM or the AI products and services that are that really is the questionable part of the market. In fact, the benefit of being a chip company in this AI story is you're supplying the architecture to build these immense AI factories. And people are already spending this. This is not about the future and potential. This is already happening. So, from Nvidia all the way down to the architecture companies, and this includes some of the companies that provide the power to the data centers, that is the most tangible part of the AI story where the benefits are already there. And again, it's easy to blame AI for money leaving India, but you know, there are plenty of markets which don't have AI trades that have actually done very well in the last couple of years. So, while it might again be easy to blame AI for why money is leaving India, I mean, let's face it. Foreign institutional investment is always a cheap trade. You go where everybody else is going. Now, South Korea, if you look at the last 2 months, has been catastrophic for foreign institutional investors. So, if you are the argument that money is flowing because the AI trade, it's really the money should be flowing back to India. So, if it's not flowing back, then the question you got to ask is, what is, you know, what are the reasons the India story is not selling as as well as it did 2 or 3 years ago. And again, it's good to get some perspective. India Indian markets are down, but relative to where to what? Where they were a year or 2 years ago, of course. But relative to 5 or 10 years ago, markets had a great run. Sometimes, you need to take your profits and kind of consolidate. So, before we attach big stories to why foreign investors are leaving Indian markets, I think the story has to be fine-tuned to what else is going on. What else can explain these abs and flows of foreign institutional investment?
I'm I'm actually going to put that question to you. Why do you think FIIs are leaving in droves and not really coming back? A few years ago, the question was about valuations in Indian markets. Clearly, we're not as highly valued as we were even a year ago. Valuations have come off.
Indian markets have have a fundamental problem, which is Indian investors, for the most part, are almost forced at gunpoint to invest in domestic markets. It's very difficult. I know it's easier now than it was 10, 20 years ago, but investing outside the Indian market has become more, you know, has become easier, but it's still very difficult to do. So, in many ways, Indians have invested in the Indian market, and they don't have the luxury of foreign institutional investors to take their money out and going elsewhere. Is India a better priced market than it was a year ago? Obviously. But it's still if if you think in terms of relative pursuit of my money, it's not a market that competes with another emerging market with the same amount of risk without the capital restriction that India does. So, I think that there's a cleaning up phase, and it might be healthy for Indian markets to actually take a pause, kind of consolidate, and think about how things are priced. And that's healthy for markets in the long term rather than this endless up run where people basically come into the market expecting to make money no matter what. That's not a healthy equity culture. So, sometimes developing an equity culture requires these consolidation phases. And for me, India is going through that consolidation phase. It's still by no stretch a cheap market. It's just cheaper than it was a year or two ago, and that's a relative statement.
There's an ongoing debate in India right now, and I want you to weigh in on about how domestic investors coming in through SIPs and other means are just providing liquidity for FIIs to exit the Indian equity markets. What do you think about this?
I think you know, again, that's FIIs are not in across Indian equities. They're in the large cap Indian equities and liquid Indian equities. So, so I mean, there are some questions to which the data has the answer. If the reason that the if if this is all about providing funds, capital, exit strategies for FIIs, you should really have two divergent markets in India. You take out the large cap liquid stocks, you look at the rest of the market. The rest of the market should be incredibly cheap if this is all about exit strategies for institutional investors. I think that's part of the story, but that's part of the market. That's neither good nor bad. And my problem is not that they provide exit strategies for foreign institutional investors. It's that you're forced to provide that exit strategy. I think the Indian market would be healthier if the capacity for Indian investors to invest overseas was significantly expanded. But let's be clear, that's going to be painful. It's going to be painful for Indian equities cuz at phase we have that transition is always going to mean a correction downward. And it's going to be painful for Indian companies that have had access to equity at what should really what what I would call below market rates. Rates lower than they should be paying given the risk that you're taking on. And I think for Indian corporates that's a great thing to have access to this capital at below market rates, but it's not good for them long term to have that capital because they get lazy and they develop bad habits about how to invest.
You know, coming back the question of AI, which seems to be the all pervading point right now. How transformational at its core is AI? Because you were talking about how Korea has has has done terribly despite in the last 2 months despite having that one AI trade. And what does it really mean for Indian IT companies?
Let me ask you a question. How often during the day is an AI agent helping you in what you do? I mean, you talk to Siri on your Apple, there's an AI agent in the background. You get on Google, there's an AI agent looking at what you're searching for and providing a summary. This is not an abstraction. This is in all our lives. So, the notion that AI is like the metaverse, a passing fancy, that's out of the picture. It's clearly transformation. It's clearly big. But that doesn't mean it's worth a lot of money. And that sounds weird. This can be a big market where the competition is so intense that companies don't make much money. The unknowns in AI are not so much about market size. So, the market size I think it's going to be big. The question is how profitable is it going to be and what will companies in the the AI companies have to invest to deliver that growth? So, the questions are more about business models that will make money than about whether AI is a big market. I think we have to concede that even in the pessimistic scenarios, AI is a market that could be in the trillions of dollars. And that's not necessarily good news because that means people are going to be losing jobs to AI agents. So, it's a big market, but the questions that that kind of hang over it and I don't think even the big players know the answers these questions. Is it going to make money for the companies that provide the LLMs and the AI architecture? And what will they have to invest to keep this engine going?
As well, to you, what is the most exciting AI story? Is it the chip makers, the LLMs, the data centers? Which part of you Which part of this AI buffet do you find the most exciting?
I think almost all the big stories are still in the architecture. I mean, I think of AI the architecture is building a big factory. And that factory needs chips, it needs data centers. There are all these companies that feed off it. They've been discovered already. That's the discovered part of AI. The LLMs have thrust themselves in the spotlight, so they've been discovered, too. I think the big part and but they're both still the factory part. The products and services that come out of this factory are what will keep the factory going. And this is, I think, the most astonishing feature of the AI build-out. We've spent more money building this AI factory than any other infrastructure investment we made in the last century. You can go railroads, you can go to automobile companies. We've spent basically trillions of dollars building [snorts] the architecture without a sense of whether the products and services that will come out of that architecture will make enough money to make this architecture worth building. I think the next the phase of AI where people will make money next will be in the product and service part. What kinds of companies are providing AI products and services that will make money for those companies, not just sell a lot, but make money. Right now, I can't think of a single company that that's the company that's going to do it. But we're If If you think about If you go to the dot-com boom and bust, I mean, you go to 1997, '98, there are lots of dot-com companies. You don't know which ones would win. Eventually, it had to win out on Amazon. [clears throat] There will be a winner in this space. I don't know what that winner looks like right now. It might not even be public. But, the winner will be a company that delivers products and services rather than the architecture company. I mean, you look back again at previous booms and busts. The infrastructure architecture companies were not the end winners, right? The dot-com boom, it wasn't Cisco, which made the networking equipment, that ultimately ended up as the big winner. It was Amazon. And I have a feeling with with AI, you're going to get the same phenomenon play out. It's not going to be the chip companies. It's not even going to be the LLMs. It's the companies that provide the products and services with that architecture and are able to do so in a money-making way that will be the big winners.
And can any of these companies come out of India, considering we seem to be entirely left out of the AI party?
Let's ask a more generic question, right? I mean, if you look at every boom in the last 40 years, the technology boom, almost all of it is centered in the US. For better or worse, that's where it seems to be centered. And it's not just Cuz I mean, people always give the easy excuse, it's because you have more venture capital access in the US. Yeah, that might be true, but I think that you got to step back and ask, why is it that if you look at the top 20 Indian companies, you don't see any young companies in that mix. One of my tests of whether a market and economy is in balance is whether you have companies across the life cycle at the top of the market cap table. I mean, let's take an example. You take the S&P 500, you take the top 25 companies. You know, you take a company like Facebook, it's 14 years old. It's young by corporate standards. Yeah. Nvidia is 26 years old, but it's still young by corporate standards. There are a lot of young companies in there that essentially have blown out of small market caps to become large market caps. I can't think of a single other market in the world, not one. No, maybe South Korea with the chip companies briefly. Where we took the You take the Sensex, trade in India. You take the Sensex, go down the list. Look at chronological age, look at corporate age. The end game seems to be that you have to become a large mature company to make it on that list. There's got to be something structurally in the US that allows these young companies to kind of break out and become the largest market cap companies. And I think until you fix that structural issue, India has the smarts to do it. They have the technology to do it, but the structural challenges that you face in making I mean, you have lots of startups, right? But they tend to be startups like, you know, you take Zomato, you take Paytm. You You have startups that essentially rise to a certain point, but they never make it to the very top of the list, or they stay in a space. You need to find a structure that allows young companies to break out to the point that all of a sudden they're towards the top of the market cap table. And that might require structural changes, a willingness to forgive people who made mistakes, to let them try again. I mean, that's one of the things about about Silicon Valley is how many people are on their fifth or sixth company, and the previous tries have all been failures. Maybe there's something structurally that needs to change for those great AI because there's nothing that requires I mean, there's nothing US-based that cannot be replicated elsewhere.
A couple of quick follow-ups to that. For one, in the Indian context, have quick commerce companies and e-commerce companies that are attracting huge capital not been seen? Is that our answer to innovation?
It's not just India, right? 90% of what we've called innovation for the last 20 years is surface level innovation. By that, I mean, food delivery wasn't invented by technology. So, Zomato is just taking an existing business and living on I've told people I mean, I've argued with people that you know, these companies should turn over a third of their market cap to Apple and Samsung and Reliance Geo because it's their only smartphones plus the internet and then they add a business on top that allows them to take an existing business and make it scale up. There's nothing innovative about this in terms of hey, we're changing the way people live. So, it's not just in the even in Silicon Valley, 90 to 95% of the startups in the last 20 years really haven't changed much other than breaking down existing businesses and making them more winner-take-all businesses. You know, and and I think that's you know, so it is true a lot of lot of stuff and that's why I said SpaceX is not just a technology company. It's not an app company. It's not a software company. The reason people are attracted to SpaceX it does real things that are technologically at the cutting edge.
You know, Ashutosh, you spoke earlier about the AI trade souring in some markets. Do you share some of the concerns investors seem to be having around how much AI can actually do versus what is being portrayed right now?
It's It's It'll happen and you should expect it to. I call it the big market delusion, which is anytime there's a big market people will overreach. Why do they overreach? Because that's That's what human beings do. They try to They think they can do things that cannot be done collectively. Thank God for that because that's what leads to change. Every big, you know, disruption innovation in markets and economies has also been accompanied by a big market boom. And then there's a correction and a cleaning up and he said, "I wish I hadn't done that." But, you know what? So what? It's good to have big market delusions driving people to overreach because that's how you get change. You know, my class is the question I ask is, do you want to live in a world run by actuaries? We'd still be in caves. Cuz they'd be still assessing the risk in fire. You need people to overreach, but it also means that when you when people overreach, there will be a correction and a cleaning up. And as long as that cleanup doesn't spill over into the rest of society, why does it matter? I mean, why are you worried that people are you know, putting their money in SpaceX and 2.2 trillion? It's not your money. So, when people are, you know, start complaining and wagging their finger about how speculative markets have become and how much people are paying for these young companies, my advice is mind your own business. Just go back and manage your own money. Don't worry about what other people do. Let them make their mistakes. And the only caveat I said is if their mistakes spill over into the rest of the society. And that happens when they borrow too much to fund these this architecture. Cuz then when they fail, it's not just they who are bearing the cost, it's the rest of us. So, the part of AI architectures that I worry about is that component of AI architectures that's funded with debt. That's not the max seven. That's not Nvidia. It's mostly small to mid-size companies that are using borrowed money to build AI architectures. And those companies, when the reckoning comes, are going to take some of us down with them. And that's the part of AI that worries me, but the rest of AI, there's going to be a cleaning up, there's going to be a correction. There There in some of these companies who are going to lose money. They've already done, right? Microsoft is down what 35, 40% from its peak. But that's okay, you know, that's part of investing. You take risks, sometimes they pay off, sometimes they don't. And it's not fair just taking a segment and say, "Look how much money I lost over the last 6 months." If you invested 5 years ago.
Mhm. The very real impact though of AI is on jobs, isn't it, Ashpata? How do you see that panning out?
And that's really not even a market issue, it's a macro issue, right? The most optimistic stories about AI, the kinds of stories that lead you to put 10 trillion, 15 trillion, 20 trillion as market for AI, are terrifying stories. For the AI market to be worth the 26 trillion for instance that you saw in the SpaceX prospectus, I would estimate that one out of every two white-collar workers would have to lose their jobs. Lawyers, consultants, bankers, journalists, you know, where do they go? What are they going to do? And think of the income that leaves the economy when those people lose their jobs. Who's going to be buying all this stuff that your AI products and services deliver? So, it is potentially catastrophic. You don't want the best-case AI scenarios to play out. Because while they may be great for AI companies, it will be catastrophic for the rest of us. At the other extreme, AI could just be a tool that allows us to become more productive. In which case, it's a much smaller market. That's bad news for AI advocates, but it's good news for the rest of us. My guess is we'll fall somewhere in the middle there. We will have white-collar jobs lost in subsets of the economy, but it's not going to be as massive as the AI optimists think it's going to be. But it's not going to be as benign as the people who are blowing off AI saying nothing's going happen. I can I'll continue to do what I'm doing today.
As with we can go on speaking because you know, you put things so succinctly, but thank you so much for your time and we hope we have a conversation soon.