Artificial intelligence (AI) is not the main reason to buy Nvidia stock, according to the “Dean of Valuation”. This is what He says.

If I had to choose a reason to invest in Nvidia (NVDA 4.05%) right now, it would be the company’s growth prospects powered by artificial intelligence (AI). Many investors would no doubt agree with me.

But not all. Aswath Damodaran, a finance professor at New York University often called the “Dean of Valuation,” disagrees. AI is not the main reason to buy Nvidia stock, according to Damodaran. However, he believes there could be another factor.

Has Damodaran changed his mind about Nvidia?

Earlier this year, Damodaran posted on X (the app formerly known as Twitter) that Nvidia “is a bridge too far for me.” He added that he halved his position in the stock in the summer of 2023 and is doing so again.

Damodaran built a model to evaluate all the so-called “Magnificent Seven” stocks. He calculated that Nvidia’s fair value was $436.34 per share. That was before the company’s 10-for-1 stock split, so its fair value translates to $43.63 after the split.

Nvidia is now nearly 2.7 times Damodaran’s fair value. Has the “Dean of Evaluation” changed his mind about the actions? Not really.

Damodaran still sees Nvidia as too expensive to buy. However, he recently offered a hypothetical reason why the stock might be worth buying for some investors.

What could justify buying Nvidia right now

Niels Kaastrup-Larsen interviewed Damodaran for his “Top Traders Unplugged” podcast earlier this month. When the topic of Nvidia came up, the NYU professor offered an interesting take.

Damodaran said AI doesn’t justify Nvidia’s nearly $3 trillion market cap. Instead, he said, “Nvidia is expected to find another deal there that is big and be the first mover there.”

Nvidia has a pretty good track record in this regard. Damodaran told Kaastrup-Larsen, “It’s a company that has been able 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.”

Why doesn’t Damodaran think AI will offer enough upside potential to justify buying the stock at the current price? He explained, “Even if you believe Goldman Sachs the numbers for AI being 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.”

Nvidia’s new potential markets

Let us assume that Damodaran is right. What new markets could Nvidia enter to make the stock a great pick now? Several possibilities come to mind, many of which the company is already targeting.

For example, quantum computing could represent a huge opportunity in a few years. The metaverse is another possibility.

However, I think Nvidia’s biggest potential is in AI — but an extension of AI beyond what’s available now. Some experts believe that artificial general intelligence (AGI) could be developed by the end of this decade. Robotaxis using AI technology could become a massive market in a few years. Edge AI — running AI models on devices locally rather than in the cloud — could be a key opportunity for Nvidia, particularly with consumer devices like smartphones and smart glasses.

What Damodaran is talking about is called optionality. Nvidia could have a lot of options going forward. The “Valuation Dean” is not sufficiently confident in the company’s ability to capitalize on its share buyback opportunities. But for those investors who are, Nvidia’s current pullback could present a great buying opportunity.