Aswath Damodaran, renowned as the “Dean of Valuation,” is a prominent figure in the world of stock valuation. A professor at the Stern School of Business at New York University, he has authored several books and papers on valuation, making him a significant authority in the field. Lately, Damodaran’s actions have raised eyebrows, particularly his substantial selling of Nvidia stock, a move that could spell trouble for the chipmaker on Wall Street.
Image source: Nvidia.
Damodaran’s assessment of the “Seven Samurai”
Damodaran has colorfully referred to Nvidia, Google parent Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla as the “Seven Samurai” or the “Magnificent Seven.” In his view, these stocks have been akin to the characters in Akira Kurosawa’s classic movie “The Seven Samurai,” who saved a village from bandits. According to Damodaran, these seven stocks “saved investors from having back-to-back disastrous years in the stock market.” He underscored the remarkable surge in their combined market cap from $1.1 trillion in 2012 to a staggering $12 trillion by the end of 2023, surpassing the total market cap of all publicly traded stocks in China.
Nvidia, in particular, has been a standout performer among these stocks with its shares skyrocketing by more than 165x over the last 10 years, including a more than threefold increase in value over the past 12 months.
Damodaran acknowledged that all the “Magnificent Seven” companies “qualify as very good to awesome, as businesses.” However, his position on Nvidia’s valuation is ringing alarm bells for investors.
What Damodaran thinks about Nvidia
With Nvidia’s meteoric price surge, Damodaran views it as the most overvalued among the “Magnificent Seven” stocks. Recently, he expressed his reservations stating that Nvidia “is a bridge too far” for him and announced his intention to sell half of his holdings in the company. Although he remains optimistic about Nvidia’s growth prospects, his valuation model suggests the stock is significantly overvalued, estimating a fair value of around $436, a striking 40% below its current share price.
Despite Damodaran’s assessment, some investors may question whether they should follow suit and divest their Nvidia holdings. While it’s tempting to mirror the actions of a well-respected valuation expert, it’s essential to weigh the situation carefully.
While Damodaran raised cautionary flags about Nvidia, some believe that a sharp decline in the stock’s price could present a compelling buying opportunity, especially for those willing to weather the storm.
Before jumping into Nvidia, investors should also consider other stock options with promising potential, especially those identified by reputable sources such as the Motley Fool’s Stock Advisor service, which has a history of outperforming the S&P 500.
*Stock Advisor returns as of February 12, 2024