If I were to choose a single justification for investing Nvidia ( NVDA 4.05% ) At the moment, the company’s potential for growth is driven by artificial intelligence (AI). I believe many investors would also share this view.
However, not all experts share this view. Aswath Damodaran, a finance professor at New York University known as the “Dean of Valuation,” has a different opinion. Damodaran believes that artificial intelligence is not the primary factor driving the purchase of Nvidia stock. Instead, he suggests that there may be another significant factor at play.
Is Damodaran reconsidering his position on Nvidia?
In a post on X (formerly Twitter) earlier this year, Damodaran mentioned that he believed Nvidia was too risky for him. He stated that he had reduced his investment in the company by half in the summer of 2023 and was now doing so again.
Damodaran created a framework to assess the worth of all the supposed Stocks that are considered exceptional or outstanding. Before the 10-for-1 split, he determined that Nvidia’s fair value was $436.34 per share. stock split After the split, his fair value amounts to $43.63.
Nvidia’s current valuation is almost 2.7 times greater than Damodaran’s estimated fair value. However, this does not indicate a shift in the opinion of the renowned valuation expert regarding the stock.
Damodaran maintains his opinion that Nvidia is overpriced for purchase. Nevertheless, he has recently presented a theoretical scenario in which the stock could be considered a viable investment option for certain investors.
What reasons support purchasing Nvidia at this time?
Niels Kaastrup-Larsen recently interviewed Damodaran for his podcast “Top Traders Unplugged”. During the conversation, the NYU professor shared a unique perspective on Nvidia when it was discussed.
According to Damodaran, the current market valuation of Nvidia, which is nearly $3 trillion, cannot be solely attributed to AI. He believes that investors are anticipating Nvidia’s potential entry into a new lucrative market as a pioneer, driving up the company’s value.
Nvidia has a strong history of success in this area. Damodaran informed Kaastrup-Larsen that the company has been successful in identifying and entering new markets before its competitors, such as in gaming, cryptocurrency, and artificial intelligence.
What is the reason Damodaran does not believe that AI will offer sufficient growth prospects to warrant purchasing the stock at its present value? He clarified by stating, “Even in the event that you are in support of the concept…” Goldman Sachs Estimates suggest that the AI industry is worth either $3 trillion or $4 trillion. Nvidia’s contribution to this industry, through providing AI architecture, is estimated to be around half a trillion dollars. This amount is even greater than what most predictions had anticipated for the growth of the AI chip sector.
Potential new markets for Nvidia
Suppose Damodaran’s analysis is accurate. What are some potential new markets that Nvidia could explore in order to enhance the appeal of their stock? Numerous opportunities exist, with the company already focusing on several of them.
For example, computing using quantum-mechanical phenomena has the potential to become a significant opportunity in the coming years. metaverse Another possibility exists.
In my opinion, Nvidia’s AI capabilities hold significant promise, particularly in advancing AI capabilities beyond their current limitations. This view is shared by some experts. Artificial General Intelligence (AGI) is a term used to describe a type of artificial intelligence that can understand, learn, and apply knowledge in a wide range of tasks, similar to human intelligence. Robotaxis powered by AI technology have the potential to be created by the end of the next ten years. The utilization of AI in robotaxis could lead to a significant market growth in a short span of time. Edge AI, which involves running AI algorithms on local devices rather than the cloud, could present a valuable opportunity for Nvidia, particularly in consumer gadgets like smartphones and smart glasses.
Damodaran discusses the concept of optionality, which refers to the potential for multiple future opportunities. Nvidia may have significant potential for optionality down the line. Despite doubts from the renowned valuation expert, investors who believe in Nvidia’s ability to make the most of its opportunities may view the current dip in the stock as a favorable chance to purchase.
