Is high-flying Nvidia dangerously overvalued?

Nvidia shares have almost tripled this year, driving the artificial intelligence (AI) chip stock to a trillion-dollar valuation. Is it overvalued?

Yes, says Prof Aswath Damodaran, Wall Street’s so-called “dean of valuation” and an Nvidia shareholder since 2018. Damodaran devoted 7,000 words to Nvidia’s valuation in a recent blog post. Essentially his take is this: even assuming a very upbeat future for Nvidia, with revenues growing tenfold and massive profit margins approaching 40 per cent, you get a valuation of about $240 – way below the $420 level that the stock was trading at last week.

Now, valuation is an imprecise science, and Damodaran admits there are scenarios in which the company really is worth $400 or more. However, his estimates suggest the odds of this are extremely low.

All that said, Damodaran chose to sell only half of his Nvidia shareholding, an inconsistency he justified by saying he is a “pragmatist, not a purist”. Traders might add that Nvidia may well go much higher as momentum is a powerful factor and valuation is not a timing tool.

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Still, investors should be careful, says Damodaran. AI will likely change our lives and markets, he says, but the lesson of history is it will create “a few big winners and lots of losers, and cause investors more disappointment than hope”.