NYU finance professor Aswath Damodaran discussed NVIDIA’s stock performance, noting that despite impressive earnings, the stock fell due to high investor expectations and a disconnect between AI investments and actual revenue generation. He emphasized that the sustainability of growth in the AI market hinges on consumers’ willingness to pay for AI products and services, which will ultimately determine the future of companies like NVIDIA.
In a recent discussion, NYU finance professor Aswath Damodaran, known for his expertise in valuation, shared insights on NVIDIA’s stock performance following the company’s impressive earnings report. Despite a remarkable 94% growth in revenue and high operating margins, NVIDIA’s stock price fell by 4%. Damodaran highlighted that this decline reflects the heightened expectations investors have for the company, indicating that merely meeting or exceeding analyst estimates is no longer sufficient; NVIDIA must surpass them by a significant margin to maintain investor confidence.
Damodaran pointed out that the current market dynamics are influenced by both company-specific factors and broader market trends. While investor sentiment has improved, allowing for higher stock valuations, NVIDIA’s situation is unique due to its substantial market capitalization growth over the past year. He noted a disconnect between the investments companies are making in AI technology and the actual revenues generated from AI products and services, suggesting that this gap will become increasingly relevant in future earnings reports.
The conversation also touched on the challenges of investing in NVIDIA, particularly given its recent performance and the competitive landscape. Damodaran compared the current situation to past skepticism surrounding other tech giants, like Apple, emphasizing that NVIDIA’s unique position in the AI chip market could justify its high valuation. However, he cautioned that the overall market might be reaching a stress point, as the demand for NVIDIA’s chips is contingent on the success of other companies in monetizing their AI offerings.
When asked what evidence would convince him to continue investing in NVIDIA despite its high price, Damodaran explained that investors would need to believe in the potential for significant growth in the AI chip market. He stressed that even with NVIDIA’s current dominance, the stock price would require additional market expansion or new revenue streams to justify its valuation. This highlights the inherent risks of investing in a company that is heavily reliant on future market developments.
Finally, Damodaran suggested that the current hype surrounding AI might lead to a broader market rotation, as investors reassess their positions. He indicated that the AI trade may need to pause for a reality check, particularly regarding its monetization potential. The ultimate test for the AI product and service market will be whether consumers are willing to pay for AI features, as this will determine the sustainability of the growth narrative surrounding companies like NVIDIA.