Stock market maven Aswath Damodaran has earned his moniker as the “Dean of Valuation” for good reason. As a professor at the Stern School of Business at New York University, Damodaran is a renowned author of papers and books on valuation, including the reader-friendly The Little Book of Valuation.
His opinions on stock valuations carry weight, and it raised eyebrows when the “Dean of Valuation” recently disclosed relentless selling of Nvidia (NASDAQ: NVDA) stock.
Image source: Nvidia.
Damodaran’s View of the “Seven Samurai”
Famously, Damodaran likens Nvidia, alongside giants like Google parent Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla, to the “Seven Samurai,” in reference to the iconic movie characters who saved a village from bandits. In this analogy, these seven stocks have carried investors through tumultuous market conditions.
Damodaran’s recent blog post traced the exceptional growth of these stocks over the past decade, resulting in a combined market cap surge to an astounding $12 trillion by the end of 2023. Notably, Nvidia has been the standout performer, with its shares soaring more than 165x in the last 10 years and tripling in value over the past 12 months.
Damodaran commended all the “Magnificent Seven” companies as strong businesses, but believes that except for Meta and Tesla, the rest are overvalued.
Damodaran’s Stance on Nvidia
Despite acknowledging Nvidia’s strong performance, Damodaran considers it the most overvalued of the “Magnificent Seven”. Sharing his thoughts on X (formerly Twitter), he stated that Nvidia “is a bridge too far for me” and disclosed plans to sell half of his position in the company.
Damodaran’s valuation model anticipates considerable growth for Nvidia, assuming a compound annual revenue growth rate of over 32% in the next five years, accompanied by a remarkable operating margin of 40%. However, even with these auspicious projections, he deems the stock substantially overpriced, valuing it at around $436, a marked 40% below its current price.
Should You Follow Suit and Sell Nvidia Stock?
While Damodaran’s significant sell-off might raise red flags, it’s important to note that he himself admits the possibility of misjudgment, especially if AI developments provide a more substantial boost than expected. This admission finds resonance in his similar valuation move last summer, which ultimately saw him lose out on potential gains.
However, it’s crucial to recognize that Nvidia is likely priced for perfection. Any hiccups in its stellar growth trajectory could trigger a substantial sell-off. Although, on the flip side, a severe dip in Nvidia’s share price could present an enticing buying opportunity.
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