Here’s what needs to happen for Nvidia’s price to be justified, says valuation dean

Wednesday was another tough day for the stock market, this time with a weak bond auction adding to the bearish sentiment.

Nvidia NVDA, a market favorite for the past two years, is down 5% and could be said to be in a bear market now as it is down more than 20% (23% to be exact) from its peak recent.

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For those tempted to dive in, NYU Stern School of Business finance professor Aswath Damodaran, often cited as the “dean of valuation,” says Nvidia’s stock price only makes sense if investors assume the company will invent and succeed in a segment entirely new.

“I’ll tell you one thing in favor of Nvidia. I call it my opportunistic growth company,” he said in an interview with Niels Kaastrup-Larsen of the Top Traders Unplugged podcast. “It is a company that has managed to find new markets and jump into them before everyone else. He did it with games. He did it with crypto. He did it with AI,” he said.

“The first time, you can call them lucky. The second time, you can really call them lucky. Third, there is something the company is doing that allows them to get ahead of the competition and the big market,” he added.

Damodaran said that while it’s a bet investors can make, “it’s not AI that justifies (the peak valuation) of $3 trillion. Expect Nvidia to find another deal that’s big and be the first mover there.”

He drew several comparisons between Nvidia and networking equipment maker Cisco during the dot-com bubble of 2000. “Even if you believe the Goldman Sachs numbers for AI to be a $3 trillion business or a $4 trillion business , the architecture for AI, which is what Nvidia offers, can’t be more than half a trillion of that. And that’s actually higher than any of the predictions we’ve seen for how high the AI ​​chip business has gone,” he said.

Related: Nvidia stock offers “tremendous opportunities” after the selloff, says this analyst

Perhaps more striking than his analysis of Nvidia is his view of value investing in general. “I think I’m not going to shed any tears for the burying of value investing as it has been, because it’s time to put it back together,” he says.

The story continues

He said he had never attended a Berkshire Hathaway shareholder meeting in Omaha. He called the meetings “righteous” and “ritualistic,” from purportedly reading Benjamin Graham to “worshiping at the altar of (Warren) Buffett and (Charlie) Munger.”

“‘We are the adults.’ Basically, that’s what we’ve heard from value investors. “We are the adults. These traders are shallow. These tech investors are shallow,” Damodaran said. “And the problem with being righteous is that you think you deserve to be rewarded for doing the right thing. And that’s a terrible place to start investing.”

Damodaran said he owns every one of Magnificent Seven’s shares. “I didn’t buy them in 2023, thank God, but they were all cheap at one point and I chose to buy them then,” he said. “At the right price, you should be willing to buy any stock.”

Market

US ES00 NQ00 stock index futures rose after jobless claims data. The yield on the 10-year Treasury note BX:TUBMUSD10Y also rose after early declines.

humming

There’s another big Treasury auction on tap — this time a $25 billion auction of 30-year notes. Weekly jobless claims fell to 233,000.

Warner Bros. Discovery WBD took a $9.1 billion charge as viewers shift away from traditional television and the company deals with a potential future without National Basketball Association games.

Dating app provider Bumble BMBL saw its shares fall after the company cut its revenue estimates for the year.

Eli Lilly LLY led Thursday’s earnings wave as the drugmaker easily beat earnings expectations and raised its guidance for the year. Rival Novo Nordisk reported price pressure on its weight loss drug on Wednesday.

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