Aswath Damodaran deserves his nickname of the "Dean of Valuation." He teaches corporate finance and valuation at the Stern School of Business at New York University. Damodaran has written multiple papers and books on valuation, including The Little Book of Valuation targeted for a general audience. He also regularly provides data on corporate valuations on his website.
Any list of the world's most prominent stock valuation experts will include Damodaran. When he thinks a stock is overvalued or undervalued, it's usually a good idea to pay attention. That's why it caught my eye when the "Dean of Valuation" recently revealed that he's selling Nvidia (NVDA 6.18%) stock hand over fist.
Image source: Nvidia.
Damodaran's assessment of the "Seven Samurai"
Damodaran likes to refer to Nvidia, Google parent Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla as the "Seven Samurai." They're more popularly known as the "Magnificent Seven." Damadoran, though, thinks these stocks are akin to the characters in Akira Kurosawa's classic movie The Seven Samurai who save a village from bandits. In his view, the seven stocks "saved investors from having back-to-back disastrous years in the stock market."
In a blog post earlier this month, Damodaran noted that investors who haven't owned at least some of these stocks over the last decade would have had a difficult task in beating the market. In 2012, the combined market caps of the "Magnificent Seven" stocks totaled $1.1 trillion. By the end of 2023, their combined market cap had soared to $12 trillion -- greater than all of the publicly traded stocks in China.
Nvidia has delivered the biggest gains of the "Magnificent Seven" by far. Over the last 10 years, the chipmaker's shares have skyrocketed by more than 165x. The stock has more than tripled in value over the last 12 months.
Damodaran wrote that all of the "Magnificent Seven" companies "qualify as very good to awesome, as businesses." However, he believes that only Meta and Tesla are close to being fairly valued while the rest are overvalued.
What Damodaran thinks about Nvidia
With Nvidia's sizzling-hot returns, it's not surprising that Damodaran views the stock as the most overvalued of the "Magnificent Seven." He recently posted on X (the social media platform formerly known as Twitter) that Nvidia "is a bridge too far for me." Damodaran stated that he planned to sell half of his position in the stock.
The NYU professor isn't pessimistic about Nvidia's growth prospects, though. His valuation model assumed that the company will be able to increase its revenue by a compound annual growth rate of more than 32% over the next five years. Damodaran also projected that Nvidia will achieve an exceptional operating margin of 40%. He noted that he "built in substantial value" from artificial intelligence (AI) in his valuation of Nvidia.
But even with great expectations for Nvidia, Damodaran still thinks the stock is way overvalued. His model calculated a fair value for the stock of around $436. That's 40% below Nvidia's current share price.
Should you sell Nvidia stock, too?
I don't think that all investors should rush to the sidelines with Nvidia just because a prominent valuation expert is aggressively selling his shares. Damodaran acknowledged that his valuation analysis of Nvidia could be off if AI provides a significantly greater tailwind than he expects. I think that's a possibility.
He performed a similar valuation analysis of Nvidia last summer. Damodaran sold half of his position in the stock then, too. He left a lot of money on the table as a result.
However, investors should take heed that Nvidia probably is priced for perfection. Any interruption in the company's remarkable growth would likely cause a major sell-off. In my view, though, a sharp decline in Nvidia's share price could also present a great buying opportunity.
