In Ashwath Damodaran’s opinion, NVIDIA needs to do one thing to justify its premium valuation.
What’s one reason to invest in Nvidia? (NVDA 4.05%) At the moment, the company’s growth prospects driven by artificial intelligence (AI) will be the focus of attention, and many investors would no doubt agree with me.
But that’s not the case. Aswath Damodaran, a professor of finance at New York University and often referred to as the “dean of valuation,” disagrees. AI isn’t the biggest reason to buy Nvidia stock, Damodaran said. But he thinks another factor could be the biggest reason.
Has Damodaran changed his mind about Nvidia?
Nvidia is “too big for me,” Damodaran wrote on X (formerly the Twitter app) earlier this year, adding that he planned to cut his stake in the company in half in the summer of 2023 and then cut it again.
Damodaran built a model to value all of the so-called “Magnificent Seven” stocks. He calculated that NVIDIA’s fair value is $436.34 per share. That’s before the company’s 1-for-10 stock split, so after the split, the fair value would be $43.63.
Nvidia shares are currently trading at about 2.7 times Damodaran’s fair value. Has the “Dean of Valuation” changed his mind about the stock? Not really.
Damodaran still believes Nvidia is too expensive to buy, but he recently offered hypothetical reasons why the stock might be worth buying for some investors.
What are the good reasons to buy Nvidia now?
Niels Karstorp-Larsen interviewed Damodaran on his podcast, Top Traders Unplugged, earlier this month, and when the topic of Nvidia came up, the NYU professor offered an interesting observation:
Damodaran said AI doesn’t justify Nvidia’s nearly $3 trillion market cap, but rather “the expectation is that Nvidia will find another big business and be a pioneer there.”
Nvidia has a pretty good track record in this space. Damodaran told Kaastrup-Larsen: “They’re a company that’s been successful in finding new markets and getting there before others. They’ve done it in gaming, they’ve done it in cryptocurrency, they’ve done it in AI.”
Why doesn’t Damodaran believe AI offers enough growth potential to justify buying the stock at current prices? He explained: “Even if you believe Goldman Sachs’ numbers that AI is a $3 or $4 trillion business, NVIDIA’s architecture for AI won’t exceed $5 trillion of that. And that’s bigger than any prediction I’ve seen of how much the AI chip business will grow.”
Potential New Markets for Nvidia
Let’s assume Damodaran is right. What new markets could Nvidia enter now that would make its stock a good buy? A few possibilities spring to mind, many of which the company is already targeting.
For example, quantum computing could be a huge opportunity within the next few years. The metaverse is another possibility.
But I think Nvidia’s biggest potential is in AI, but extending AI beyond what’s available today. Some experts believe that artificial general intelligence (AGI) could be developed by the end of the century. Robotaxis using AI technology could become a huge market within a few years. Edge AI (running AI models locally on the device instead of in the cloud) could be a key opportunity for Nvidia, especially in consumer devices like smartphones and smart glasses.
What Damodaran is talking about is something called optionality. Nvidia could have a lot of optionability in the future. The Valuation Dean isn’t very confident about the company’s ability to take advantage of the opportunity to buy stock. But for confident investors, Nvidia’s current share price decline could be a great buying opportunity.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Goldman Sachs Group and Nvidia. The Motley Fool has a disclosure policy.
