Aswath Damodoran Leaves Entire CNBC Panel SPEECHLESS

Summary

In a video discussion, respected analyst Aswath Damodaran asserts that AI stock Nvidia is overvalued, though still a good trade in the near term. His broader view is that the entire stock market is overvaluing the AI sector, resulting in unsustainably high valuations unsupported by reasonable financial modeling assumptions. The host Tom Nash clarifies that Damodaran is not predicting an AI bubble crash, rather a likely market correction before continued growth. Nash advises long-term investors to dollar cost average into AI leaders like Nvidia on dips to build a low cost basis over time, for those who believe AI is the future.

Takeaways

• 😊 Aswath Damodaran believes the entire stock market is overvaluing AI and leading to exuberant valuations.
• 😮 Nvidia is celebrated as having the greatest CEO ever, but its current pricing implies massive future growth that may be implausible.
• 🤔 Nvidia is a great trade in the near-term, but not a good long-term investment at its current valuation.
• 😲 To justify its valuation, Nvidia needs to add $400 billion in revenues to what it currently makes.
• 📈 Nvidia will likely beat earnings expectations in the short term due to current momentum.
• 😐 Buying Nvidia now means assuming total success and perfection going forward, leaving no room for error.
• 😅 Aswath isn't bashing Nvidia or claiming an AI bubble, just expects a correction because markets move in cycles.
• ⏰ The right way to own Nvidia long-term is dollar cost averaging over time through ups and downs.
• 💡 If you believe Nvidia will dominate AI hardware in the future, average into a position rather than trying to time entry and exit points.
• 📚 For learning investing basics like analyzing financials and valuation, check out patreon.com/Nash.

Q & A

What is the main point Aswath Damodaran is trying to make about Nvidia?

He is not necessarily just saying Nvidia specifically is overvalued, but rather using it as an example to show that the entire stock market is overvaluing artificial intelligence companies in general right now.

What does Aswath mean when he says Nvidia is a good trade but not a good investment?

He means it will likely continue going up in the near future so could make for good trades, but long-term it is priced for too much perfection so may not be the best investment.

What kind of annual revenue growth is Nvidia priced to achieve over the next 5 years?

It is priced for about 60% revenue growth per year over the next 5 years, which Aswath sees as very ambitious.

Does Aswath think artificial intelligence and Nvidia specifically are overhyped?

No, he clearly states that AI is real and will make a difference to business, and Nvidia is well positioned in that market, but expectations are too high.

What does Tom think is the right way to invest in high flying stocks like Nvidia?

Dollar cost average - buy more when the stock drops while fundamentals remain strong, and buy less when it climbs rapidly. This helps build a cost basis closer to the bottom without timing the market.

What kind of correction does Aswath expect for Nvidia and the overall market?

He doesn't give specific predictions, but in general expects some kind of meaningful correction driven by high valuations and investor sentiment shifting.

Why does buying high priced, high expectation stocks leave little room for error?

When a stock is priced for perfection, any minor screw-ups or disappointments can lead to major valuation drops, whereas there is little upside left.

Does Aswath recommend selling Nvidia stock right now?

No, he is not outright recommending to sell, though he is pointing out the precarious risk/reward situation of buying at current elevated valuations.

What are some of Nvidia's valuation and growth metrics that Aswath sees as stretched?

He points out it needs to add $400 billion in revenues to justify its market cap. Also priced for 60% revenue growth annually for 5 years, which he sees as ambitious.

Why does Tom recommend dollar cost averaging into stocks rather than market timing?

Market timing is very difficult, whereas dollar cost averaging ensures you buy at both highs and lows automatically without needing to predict changes.

Outlines

00:00

😊 Tom Nash introduces valuation expert Aswath Damodaran's view that Nvidia is overvalued

Tom Nash summarizes a video clip by valuation expert Aswath Damodaran, who believes Nvidia is significantly overvalued right now. Damodaran thinks the entire stock market is overly excited about AI potential and is pricing stocks like Nvidia at unsustainable levels. However, Tom notes that Damodaran is nuanced - he isn't calling Nvidia a bad investment, just that its current valuation prices in perfection, leaving little room for error.

05:03

😃 Tom explains how to play the long game with Nvidia despite potential overvaluation

Tom explains the right strategy is to dollar cost average into Nvidia over time if you believe in its long-term potential. This avoids timing the market. Regularly buy more shares when the stock drops, less when it climbs. This way you get a good cost basis even if the current price is high. Tom notes this strategy is boring but necessary for investing in high growth stocks over the long-term.

Keywords

💡Overvalued

The video discusses how Nvidia's stock price may be overvalued and priced too high relative to its underlying fundamentals. Asward says it's plausible for Nvidia to grow tremendously but current valuations assume the "best company ever" with no room for error.

💡AI stocks

The video compares Nvidia to other AI/technology stocks. Though Nvidia may be the "cheapest" AI stock, Asward argues the entire category could be overpriced given high expectations for the AI sector.

💡Pricing statements

Asward critiques making valuation claims about stocks based just on comparisons within a subgroup. Though Nvidia has strong AI prospects, he believes the stock and whole sector are exuberantly priced.

💡Revenue growth

Asward notes Nvidia's lofty valuation implies adding about $400 billion in revenue on top of its current revenues. Though possible, projecting such high growth is improbable in his view.

💡Earnings beats

The video states Nvidia may continue beating earnings expectations in the short-term. But longer-term, Asward doubts such high valuations are justified or risk-adjusted.

💡Priced to perfection

A core argument is Nvidia stock being priced to perfection, assuming the best possible business execution for years. This leaves little margin for error in meeting projections.

💡Market correction

Though not predicting an AI bubble bursting, Asward anticipates eventual market corrections in Nvidia and tech stocks from current euphoric levels.

💡Dollar cost average

The video advises dollar cost averaging into Nvidia stock - buying more shares when price drops while trimming when price climbs. This helps manage risk.

💡Fundamentals

If confident in Nvidia's long-term fundamentals, the video advocates dollar cost averaging over years to build a low cost basis despite any overvaluation presently.

💡Risk management

The overall message emphasizes prudence and risk management with stocks like Nvidia. Valuations could contract so caution is warranted even for strong companies.

Highlights

Aswath Damodaran believes the entire stock market is overvaluing artificial intelligence, leading to exuberant valuations

Damodaran thinks Nvidia is a great trade in the near term, but not a very good long-term investment at current prices

To justify its valuation, Nvidia has to add $400 billion in revenues to what it currently generates

Nvidia is likely to continue beating earnings expectations in the short term since all engines are firing at full force

When you price companies to perfection, it's very hard to make money even if everything goes to plan

Damodaran isn't saying Nvidia will crash or that AI is a bubble about to burst

He's saying a correction for Nvidia and the overall market is due since no company goes up at a 45 degree angle forever

If you believe Nvidia will be the hardware base for AI in the future, dollar cost average to build a position over time

Buy more Nvidia on down days and bad news, unless the fundamentals change

This system requires discipline to steadily accumulate shares, but gets your cost basis lower without timing the market

Join Tom's free Discord community with 8,000 members to discuss investing

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Consider joining his Academy on Patreon to learn investing step-by-step from A to Z

Topics covered include financial statement analysis, modeling, company evaluation, and more

Have a great weekend and see you on Monday!

Transcripts

hey this is Tom Nash and aswa the motor

and one of the great one of the guys who

onon the mon Rushmore of company

valuations just came out with massive

bombshell that left everyone speechless

check it out but that said though I mean

even a month ago I said only one of the

stocks look significantly overvalued

which Invidia and it's actually the

stock that's gone up the most so that

can be taken as an indication that I

either have no idea what I'm talking

about the Market's doing things that I

just don't understand so in this clip he

talks about Nvidia and how he thinks in

Nvidia is overvalued but I think the

point he's making here is not so much

about Nvidia but the entire market and

how that market right now is pricing AI

in exuberant levels I don't think I've

ever seen a company celebrated as much

as inia Jensen Wong is the greatest CEO

ever walked the face of the Earth and

this company cannot be stopped at least

that's a perception the problem wooden

momentum is everything at some point in

time the fever breaks in this clip his

point is very simple Nvidia is

overvalued but that point is actually

just a way to communicate the greater

message which is yes I'm talking about

Nvidia being overvalued but the entire

stock market right now in my opinion

it's aswa in this clip the entire stock

market is completely overvaluing

artificial intelligence and that leads

to exuberant valuations that don't match

any sort of modeling Financial modeling

that we are aware of that we have ever

applied now he got confronted by the

CNBC interviewer who showed him a clip

by Stacy rasgon who's one of the

greatest as aswath basically saying the

opposite check it out Nvidia is still

not expensive it's actually still the

cheapest of all of the AI stocks it's

way cheaper than AMD it's cheaper than

Marvel it's even cheaper than Intel at

this at this point right so I still

think there is room for expectations to

continue to go up I think so now even

though you don't see Stacy rasan on TV

every single day but he's definitely

very well respected he's one of the best

in the business he basically says look

this is the cheapest AI artificial

intelligence stock to be buying right

now and the way asth responded to this

clip was actually very interesting when

you make pricing statements against a

subgroup stocks in this case AI stocks

and say it's the cheapest of the AI

stocks that might very well be true but

they might all be overvalued I think at

the moment the the fact that I think we

have to accept as AI is real it's going

to make a real difference to business

and I think Invidia is in the front seat

of that market that said though that

pathway is not as easy and as and as um

as open to profits as the market seems

to be assuming it is I mean right now

Nidia is in a strange place you ask me

it's it's a great trade but not a very

good investment the question to to ask

now if you're an investor is if I get in

now what am I pricing it I mean if you

back out from the pricing the $2

trillion market cap what inia has to do

break even it's got to add about $400

billion in revenues it's got to add 400

billion revenues to what it has as

revenues right now that's a daunting

task it's plausible but if investing is

about the game of the probable and you

play the plausible game you're setting

yourself up to lose near term they will

beat their revenue and earnings targets

because there know all engines are are

are firing at at at full force right now

so I wouldn't be surprised upon the next

earnings report they took their earnings

expectations and beat them again which

is what pricing is all about that's why

I said it's a good trade is in the near

term they're more likely to deliver

upside surprises but in the long term

when you price the company to be the

best company ever what is the upset and

before everybody goes off and sells

their Nidia stock hang on a second you

have to understand that asth is a very

Nuance guy here's the point he's making

here he's not saying that Nvidia is

going to crash he's not saying that the

AI is a bubble it's a DOT and all that

stuff that's not what he's saying he's

saying look right now Nvidia is priced

to Perfection it is priced to have the

best CEO of all time Jensen wing it is

priced to be the best company of all

time for the next 10 years and it is

priced for massive growth for about 60%

of Revenue growth for a year for the

next 5 years consecutively and while it

is quite posible that that's going to

hold up for

2025 what the hell do we know about 2027

2028 what he's saying is a few things

here number one when he says Nidia is

overvalued what he's meaning is that

we're going to see some corrections on

the way up he doesn't think that Nvidia

is a Bad Company he doesn't think that

it's vaporware it doesn't think it's

hype he's just telling you hey a

correction is due no company goes up in

a 45 degree angle that doesn't happen

number two he also talks about the fact

that when you price companies to

Perfection it's very hard to make money

while you still make money on Nvidia if

everything goes according to plan and

their perfection actually pans out you

don't make as much money as choosing

companies a little bit earlier on the

hype cycle on the sentiment cycle it's

the same thing with penter when piler

was priced at $7 and at $15 it's not the

same quality of deal as buying it right

now at $25 it's just math and what he's

saying hey if you're getting into Nvidia

right now make sure you understand

you're buying total success total

Perfection and that's a very hard thing

to predict he's basically saying look if

you're buying Nidia right now go right

ahead it's a great company but you have

no room for any screw-ups no room for

risk if anything goes south that

valuation will not hold up it's not the

same thing as buying nid 300 400 buying

it right now at 800 900 and that's a

valid point and I'm sure that despite my

video most people will misunderstand

what he's saying here he's not bashing

Nvidia and he's not saying there's an AI

bubble that's about to crash he's saying

that Nvidia will have a correction the

overall Market will have a correction

because that's how stock markets work

there's always a bull market a

correction and a continuation of bull

market that's just the way things are

the one thing he didn't say in this

video which I wish he had is how to play

this as a the long-term investor the

question is okay if that's the case how

the hell do we play this if we sell now

if we wait the stock might go way higher

before it corrects again we might not be

able to get back in before a th000 etc

etc all these timing the market

questions that people always have and I

keep telling you hey that's the wrong

approach the only way to invest in a

company like Nvidia if you have decided

that Nvidia is the company of the future

is the sort of business you want to own

in 2033 they're going to be the hardware

base of AI everywhere

if that's the case there's only one way

to buy Nvidia and hold Nvidia which is

dollar cost average opposite when the

stock is going up slowly buy more every

time except the fact that you're buying

at the top but when the stock drops on

bad days bad macro days bad inflation

days bad sentiment when bad news come

out either macro or specifically about

the company and they don't change the

overall assumptions you have about the

basic fundamentals of the business you

buy more you buy more when the stock

drops you buy less when the stock climbs

but you buy at all times and in that

case if Nidia Remains the hardware base

of the entire AI industry if in 2033

they're one of the greatest companies in

the world then you have a cost base in

this company in five 6 7 8 9 10 years

that is way closer to the bottom without

timing the market at all simple as that

now not everything elegant and not

everything efficient is exciting yes

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is mandatory if you want to have clean

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Monday