Artificial Intelligence (AI) Is Not the Main Reason to Buy Nvidia Stock, According to the “Dean of Valuation.” Here’s What He Said. | The Motley Fool

If I had to choose one reason to invest Nvidia (NVDA Image 0.17%) now, it could be the company’s growth prospects driven by artificial intelligence (AI). No doubt many investors will agree with me.

But not all of them. Aswath Damodaran, a finance professor at New York University who is often referred to as the “Dean of Valuation,” disagrees. AI is not the main reason to buy Nvidia stock, according to Damodaran. However, he thinks that there may be another reason.

Has Damodaran changed his mind about Nvidia?

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

Damodaran built a model to value all stocks called the “Magnificent Seven”. He calculated the fair value of Nvidia was $436.34 in total. This was before the company’s 10-for-1 split, so his fair value translates to $43.63 after the split.

Nvidia is now about 2.7 times higher than Damodaran’s fair value. Has the “Dean of Valuation” changed his mind about the stock? Not really.

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

What would justify buying Nvidia now

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

Damodaran said AI doesn’t justify Nvidia’s nearly $3 trillion market cap. Instead, he said, “It’s the expectation that Nvidia will find another business out there that’s big and be the first leader there.”

Nvidia has a pretty good track record on this front. Damodaran told Kaastrup-Larsen, “It’s a company that can find new markets and jump into them before everyone else. It’s done it with games. It’s done it with crypto. It’s done it with AI .”

Why doesn’t Damodaran think AI will provide enough growth potential to justify buying the stock at the current price? He explained, “Even if you believe Goldman Sachs figures for AI to be a $3 trillion business or a $4 trillion business, AI architecture, which is what Nvidia offers, will not exceed half a trillion of that. And it’s bigger than any of the estimates I’ve seen about how high the AI ​​chip business is going. “

Potential new markets for Nvidia

Let us assume that Damodaran is correct. What new markets could Nvidia be entering to make the stock a good pick now? There are several possibilities that come to mind, many of which are already focused on the company.

For example, quantum computing could represent a huge opportunity within a few years. Metaverse is another possibility.

However, I think Nvidia’s biggest potential is in AI – but an extension of AI beyond what is currently available. Some experts think that Artificial General Intelligence (AGI) could be developed by the end of the decade. Robotaxis using AI technology could become a big market in a few years. Edge AI — which runs AI models on-premise rather than in the cloud — could be a significant opportunity for Nvidia, especially with consumer devices like smartphones and smart glasses.

What Damodaran is talking about is called discretion. Nvidia may have more options in the future. The “Dean of Valuation” is not confident enough in the company’s ability to take advantage of buyback opportunities. But for existing investors, Nvidia’s current pullback could present a good buying opportunity.

Keith Speights has no position in any of the products mentioned. The Motley Fool has positions and recommends Goldman Sachs Group and Nvidia. The Motley Fool has a publicity strategy.