Aswath Damodaran, the New York University professor known for his company valuations, has pushed back against criticism of his $1.475 trillion valuation of artificial intelligence company Anthropic, arguing that investors are focusing on the wrong assumptions when challenging his assessment.
In a Nov. 3 blog post titled The Anthropic Feedback Loop: The Cost of Capital Delusion and Diversion!, published on his website Musings on Markets, Damodaran examined the responses to his valuation and explained why he believes much of the criticism is misplaced.
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Damodaran said he reviewed responses to his Anthropic valuation across X, LinkedIn, Google, Substack and YouTube, along with entries in a shared Google spreadsheet where readers could submit their own estimates. The feedback showed that more investors believed he had overvalued Anthropic than undervalued it. The collective assessment put the company's value closer to $1 trillion than his estimate of approximately $1.5 trillion.
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The biggest point of disagreement, he said, was his estimate of Anthropic's cost of capital at 9.74%, which several investors considered too low for a company with substantial financial commitments and uncertain business prospects. Damodaran argued that the debate had become disproportionately focused on this figure, diverting attention from the assumptions that have a much greater bearing on Anthropic's valuation.
His Oct. 28 assessment valued Anthropic's equity at $1.475 trillion, based on the company's ability to grow annual revenue to $1 trillion by 2036, achieve an operating margin of 27.5% and generate $3 in additional revenue for every dollar invested.
The professor acknowledged that his valuation could prove wrong. However, he said investors should challenge the underlying business assumptions rather than arbitrarily increase the discount rate to arrive at a lower valuation.
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Investor Pushback
Among those who disagreed with his valuation, the most common argument, apart from those who believed Anthropic was worth nothing, was that his 9.74% cost of capital estimate was too low. Damodaran said this did not surprise him, given what he sees as the tendency among analysts and appraisers to place excessive importance on the cost of capital.
"I don't think that the cost of capital is at the center of the DCF universe," he wrote, arguing that analysts often use the figure without understanding what it measures or having a reasonable benchmark against which to assess it. He described the cost of capital as the "Swiss Army Knife of finance", given its applications in corporate finance, business valuation and investment decisions.
However, he said its importance should not be confused with its ability to determine the outcome of a valuation on its own.
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Cost Of Capital
Damodaran's defence rests on his argument that the expected return from an investment must be assessed against what investors can earn elsewhere in the market on an investment carrying comparable risk. He cited his estimate that the expected return on US equities stood at 8.99% at the beginning of October 2026. According to him, this makes it difficult to justify a cost of equity of 12% or 15% for an average US company.
He also referred to historical market returns, arguing that the expected return on US equities had not exceeded 10% since 1994. "Investors demanding returns of 15% to 20% would have to go back to the early 1980s, when 10-year US Treasury yields were 10% or higher, to find comparable conditions," he said.
Damodaran also used valuation multiples to challenge the assumptions behind higher discount rates. If investors assume that the average US company has a cost of equity of 15%, the market's price-to-earnings multiple should be around 7.5, based on his assumptions for economic growth and corporate profitability. However, the actual forward PE multiple was closer to 20.
Investors making both assumptions would therefore need to reconcile the gap, he argued. He also cautioned against automatically translating Anthropic's borrowing costs into a substantially higher cost of equity.
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Default Concerns
The debate over Anthropic's cost of capital has also been fuelled by concerns about the company's commitments to secure computing capacity and the associated financing requirements.
Damodaran acknowledged these risks but said they should be assessed separately rather than being entirely reflected in the cost of capital. In his Oct. 28 valuation, he estimated Anthropic's cost of capital at 9.74%, taking into account the risks associated with its business and computing commitments.
He also assigned the company a 10% probability of failure, recognising that weaker revenue growth could leave it struggling to meet contractual obligations.
Damodaran estimated that Anthropic had a cash balance of $114 billion, which could increase to more than $200 billion after its proposed initial public offering. He said around $70 billion of its commitments would fall due in the following year and another $76 billion in the year after. While these obligations were substantial, he believed the company's cash position would provide a buffer against near-term financing pressures.
His argument was that investors who considered the default risk higher should adjust the probability of failure in their valuation rather than simply increase the cost of capital.
He added that the cost of capital should also change as a company grows, becomes more profitable and its risk profile evolves.
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Bigger Risks
Damodaran's defence of his valuation does not mean he considers Anthropic a low-risk investment.
In his Oct. 28 assessment, he identified revenue growth, profitability, reinvestment requirements and regulation as the key factors determining the company's future value.
The most important assumption was his projection that Anthropic could generate $1 trillion in annual revenue by 2036.
He believes the artificial intelligence market could exceed $5 trillion, with Anthropic positioned in the premium segment, where more powerful models and enterprise applications could command higher margins.
He also sees an opportunity for the company to move beyond supplying AI models and agents and enter businesses that its technology could disrupt, including pharmaceuticals.
His profitability assumptions reflect this positioning. Damodaran estimated that Anthropic could eventually achieve a pre-tax operating margin of 32.5%, before reducing it to 27.5% to account for the potential impact of regulation.
However, the company will need to keep investing heavily in computing capacity to support its expansion. Damodaran assumed that Anthropic would generate $3 in additional revenue for every dollar invested.
He also warned that computing infrastructure would require regular replacement and expansion, adding to the company's future investment requirements.
Competition, slower revenue growth, customer spending patterns and regulatory intervention could all undermine the assumptions supporting his valuation.
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Investment Choice
Damodaran said investors should distinguish between determining a company's intrinsic value and deciding whether its shares are suitable for their portfolios.
He outlined several ways to deal with uncertainty, including accepting it, avoiding it, demanding a margin of safety or spreading investments across a larger portfolio. He argued that investors who completely avoid uncertainty could end up restricting themselves to mature businesses, missing opportunities in emerging industries and technology companies.
A higher margin of safety can protect against overpaying, but it can also prevent investors from buying companies that subsequently perform well. Portfolio diversification, meanwhile, can allow investors to take exposure to riskier businesses without making their overall returns excessively dependent on any single company.
Ultimately, Damodaran said the central question in his Anthropic valuation should not be whether its cost of capital ought to be 9.74% or a higher figure. It should be whether the company can deliver the revenue and profitability required to justify its valuation.
In his Nov. 3 post, he reiterated that his $1 trillion revenue projection for 2036 was the assumption that mattered most because a shortfall would affect several other inputs, including margins and the probability of failure. He said investors were entitled to disagree with his assumptions, but the debate needed to be grounded in facts and realistic expectations about returns.
"You are, of course, welcome to quote any number you want as the cost of equity and capital (and they are not interchangeable), but while you are entitled to your opinions, you are not entitled to make up facts," he wrote.
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