"NVIDIA's surge is challenging the absolute limits of sustainable value"
Text | Jack Hough
Edit | Guo Liqun
Nvidia (NVDA) had just become the first chipmaker with a market capitalization of more than $1 trillion, and a finance professor who had been investing in Nvidia since 2017 sold shares in the company, saying, "It's just luck." ”
It may be good luck, but the professor certainly relied on more than just luck, he is Aswath Damodaran, known as Wall Street's "Dean of Valuation" and has been studying how to value assets for decades, so his sale of Nvidia's stock raises the question of why he thinks Nvidia does not include Apple (AAPL), Microsoft (MSFT), Alphabet (Alphabet). GOOGL) and the "trillion dollar club" of companies such as Amazon (AMZN)? After all, AI-related companies are currently gaining traction in the stock market, and NVIDIA dominates the AI chip space.
Moreover, which other tech giants are too expensive right now? Is it a problem that the recent stock market rally has been driven by a handful of stocks?
Damo Daran told Barron's on Tuesday (May 30): "The stock market is already bad enough to drive me crazy, but you know what? Stock market width has always been poor. ”
Dharma Daran teaches corporate finance and stock valuation at New York University's Stern School of Business, and he has written many textbooks on — in his own words — "ridiculously overpriced." A recent study of 80 years of market data by Damo Daran found that big bull markets are often driven by a percentage of stocks of 10% or less. Damo Daran currently owns most of the tech giants' shares, and he said three of them were bought "last year when these stocks hit absolute bottoms."
That includes Facebook parent company Meta Platforms (META), which recently traded at $262. "I said when Meta's share price fell to $95 that the company's cash flow was good, and that's how Buffett looked at American Express (AXP) after the salad oil scandal," Damo Daran said. Judging by the 4-year cash flow of Meta's advertising business, the stock price is attractive enough. I'm buying Meta and hoping this company doesn't mess up the metaverse business. ”
The "salad oil scandal" refers to a scam in the '60s, when the vegetable oil refining company Allied Crude Vegetable Oil Company borrowed from American Express against its inflated soybean oil stocks, which the company used to buy soybean oil futures to push up the price of the uninflated portion of its inventory.
The story was full of whistleblowers, losses, chain reactions, bankruptcy, and in retrospect, it created an opportunity to buy American Express stock at a low price. If you're wondering why no one made this wonderful story into a movie, it already has a script and studio, CNBC's Ron Insana was involved in the production of the film, and according to Deadline, Buffett liked the idea.
Back to NVIDIA. Damo Daran said on Tuesday: "Until this morning, Nvidia was still in my portfolio, and I finally removed it from the portfolio because I couldn't afford such a rise, and the market value increased by $300 billion in a week, which is challenging the absolute limit of sustainable value." ”
Damo Daran estimates that Nvidia currently has an 80 percent share of the $25 billion AI chip market, with the most optimistic prediction that the market will reach $350 billion in 10 years. Even assuming that Nvidia reaches 100% market share in the future, Damo Daran will arrive at a valuation that is 20% lower than its recent share price. "I like Nvidia as a company, but if it were an investment, I wouldn't be able to value it at more than $400 per share," he said. ”
More broadly, Damo Daran calls Nvidia essentially a hardware company, while other members of the "trillion-dollar club" use software to attract large numbers of end users to their ecosystems, creating what statisticians call a "long tail distribution" of business opportunities — multiple ways to profit from new products and services.
A company that sells chips to other companies faces natural limitations, Damudalan said: "The tail of distribution tends to be more cautious, and such companies tend not to reap as much benefit as a consumer-based company with an ecosystem of billions of users, which affects your willingness to bet." ”
Damo Daran compared his current views on Nvidia to how Tesla (TSLA) felt when it reached a market cap of $1.2 trillion in November 2021, saying, "I tried my best to come up with a valuation of less than $300 billion." Tesla's stock price then fell, and then began to rebound at the beginning of the year. Damudalan said that in hindsight, Tesla shares were reasonably priced in January, and when he revalued Tesla in February, "things got a little out of control again."
Among the tech giants, Damo Daran didn't invest in Netflix (NFLX) shares, and outside the tech industry, he just bought shares of Citi (C), saying JPMorgan Chase (JPM) is a better bank, but Citi's share price is so low that it doesn't take much management to do to go up.
One way to compare Citi to other banks is to look at the ratio of its share price to its book value per share. But Damudalan said the relative valuation method is intended for traders, who in his view are better off valuing a company based on its future cash flow.
"I can totally understand people who use relative valuation, but I don't like to hear these people say, 'I care a lot about value, it's all about valuation,' no, it's not about valuation, it's a pricing game, you're doing a great job in the game, it's okay to take credit for it, but we'd better not talk about value in the context of pricing, because it's a completely different game." ”
Is the current stock market pricing reasonable? Don't bother thinking about it, Damudalan said, just buy index funds and hold them, or pick good stocks, or both.
And what about Bitcoin's recent rally? According to Damudharan, bitcoin fans "will never make bitcoin a good currency because it is in their best interest to make bitcoin a speculative and volatile tool."
When asked where the bubble is now, Dharma Daran mentioned an asset class that would not be perceived as a source of systemic financial risk: professional sports teams. For example, he said, Major League Baseball (MLB) is a low-growth business with $600 million a year in pre-tax, pre-reinvested cash flow and $10 billion "in good luck," but the team's total price is currently close to $70 billion.
Prices for teams today seem to be driven more by vanity than financial returns, but investors don't have to worry about prices hitting rock bottom overnight, Damo Daran said: "As long as the number of billionaires exceeds the number of sports franchises, there will be no crash." ”
Copyright notice: Original article by Barronschina, may not be reproduced without permission. For the English version, see the May 31, 2023 report, "Nvidia Is the New Tesla, the 'Dean of Valuation' Says. It’s Time to Cash Out.”。 (The content of this article is for informational purposes only and does not constitute any form of investment and financial advice; The market is risky, and investment should be cautious. ）