NVIDIA’s Valuation and AI’s Negative Sum Game — with Aswath Damodaran | Prof G Markets

this week's number five hundred thousand that's the record number of passports the US Department of State has issued per week this summer to meet increased travel demand [Music] welcome to property markets we're excited to bring you a conversation with or I think one of our first five-time guests asked about the motor and Professor Finance at NYU Stern we discussed with aswath as valuation for NVIDIA AI winners and losers and his thoughts on Tech's historic rally in the first half of the Year Ed any takeaways from oswath I'm just always shocked by how informed he is on basically any stock pick I mean you can put any company in front of him yeah and he has such uh an informed View and you know he's not just looking at multiples he's building out his own DCF models and coming up with opinions based on that and then the other awesome thing is that he's almost always right I feel like I've never seen a take from him that I thought was irrational or not sensible and it always feels like it works out I mean I feel like he was the one who at least partly inspired our position on meta that it was undervalued uh last year and so I'm just I love him who was the first trivia question who was the first guest on the David Letterman show there's no way I would know but man yeah I guess aswa no it wasn't it was Bill Murray so Astro authors are Bill Murray because he was the very first guest on the Prof G pod from the Rosewood mayakoba in the midst of covid when I had basically packed my go bag and grabbed my family and went to uh the mayakoba and oswath was the first guest on the property show anyways enjoy our conversation with Professor Finance aswat de modern aswath where does this podcast find you San Diego San Diego that's right you're um a quick story about San Diego my I was born in San Diego because my parents who were living in Toronto read in the newspaper that San Diego had the nicest weather in North America so they loaded up their mini Metro when my mother was seven months pregnant and two months later born in San Diego so congratulations on living on in the city with the best weather in North America well today's high is 70 today's low is 62 so wow kind of sweet spots see above San Diego so first half of the year the best year for the NASDAQ in 40 years just globally what are your thoughts about the market and what feels like uh just sort of a run-up that just sort of snuck up on us part of it was a bounce back from last year where I think investors overreacted on tech companies knocked their prices down too much and some of this just come back I mean it is highly concentrated the companies that have come back the most are tech companies bigger tech companies that make money this is not a full comeback of risk capital in the traditional sense but people are piling into everything Tech it's a very selective run-up in tech companies so there's been a redistribution of value among tech companies from money losing smaller tech companies to money making Logitech companies so it looks like a tech comeback but it's a very different comeback than the drawdown we saw last year it feels like animal spirits are coming back into the markets your thoughts there's some of that and some of the recognition that these big tech companies have incredible amounts of buffer that's what we realized last year that you could lay off 10 000 employees without a dent to your revenues that they built up a lot of fat on the way up and essentially when they cut costs those costs that cost cutting is almost Costless from a revenue perspective so I think that these tech companies have had an incredible amount of fat to burn off and as they've burnt it off markets have recognized they still stay profitable they still deliver the margins they used to you know a lot fewer people employed at them but I think that that's the recognition you're seeing rewarded this year I'd love for you to talk we when you're on the show or when you're on the Pod we talk a lot about the same names Apple meta some of the bigger players give us your thoughts around valuation and the company NVIDIA I think Nvidia has been a stock that I've had in my portfolio now for five years and um when when you talk about the online and the social media Revolution somebody's got to provide the infrastructure to make a drug in the 1990s the peak of the.com Boom people forget that the company that reached the highest market cap is Cisco a company that had nothing to do with the online retail and other space but the infrastructure for online in video in many ways has powered the tech growth for this year by providing the infrastructure the hardware to make it happen and I describe it as my opportunistic chip company well the rest of the chip makers were kind of looking at a market that had slowed down in terms of growth Nvidia always seemed to be in the right place at the right time for new markets whether that was gaming or whether it was crypto and now with AI the first time around you can say they were lucky but by the time you get to the third time around this is by Design I mean this is a company that's been opportunistic and going after markets that are just taking off and now taking you know have been able to benefit from those markets so that's why I bought Nvidia in 2018 because of the because of their opportunistic streak in the company and at the time the price had also been knocked down this is again something that people forget with these highly priced companies they act like these companies would never be untouchable as Investments but the reality is you look at the history of Nvidia it's at two near-death experiences in the last 20 years dropping 80 percent in market cap twice and in 2018 they lost 40 percent of the market cap so even these companies look and say I would never have been able to buy that stock there was a time in the last 15 years we had been able to buy the stock and I think that's the lesson that value if you're a value investor you need to takeaways you cannot just stake these stocks off the list of companies you're interested in investing in because at the right price they are great Investments I know I got lucky in Nvidia because I had no idea AI was coming but I bought the fact that they would find a way to be in that next big Market when it came along thanks for joining us I also have a question I read your recent blog your blog musings on markets and you wrote about ai's winners and losers and you wrote about Nvidia um and the conclusion that you reached at the end of the blog was that even if you assume this very highly bullish stance on the AI Market as a whole as well as assuming that Nvidia will continue to maintain relative dominance in the market in the AI chip Market if you assume all of that you still believe that that current 420 price point is still too high could you take us through your thesis there and how you concluded that no in a sense it's a series of estimates right so you know you take AI right now it's a 25 billion dollar if you're lucky chip Market is about 25 billion I look for estimates of how big that market could be 10 years up the biggest number I found was 350 billion I gave Nvidia 100 market share of that market every single chips and I still couldn't get up to 400 per share so you almost have to price in another Market out there as big as the AI Market that we haven't seen yet that Nvidia is going to be able to jump into could that happen given the history over the last decade I wouldn't rule it out but if you price that in as an expectation where's your upside you know it's one thing to buy Nvidia at 150 and so I'll get the optionality of jumping into that market it's another thing to pay 400 per share price and the expectation that there'd be another 350 billion dollar market we haven't even seen yet that they will dominate and put that into your market cap and that seems like an incredibly large risk to take if you're an investor jumping in for the first time didn't you just describe Tesla now I I value Tesla earlier this year and I came up with this was right after that travails and this again goes to my point about these companies go up and down there will be points at which the Tesla is trading at about 95 dollars per share 90 90 per share at the low point I valued them pretty close to low point and I concluded that it was close to fairly valued perhaps some upside now of course it's trading at two times that upside it doesn't surprise me in the least Tesla is always a company that oh you overshoot or you understood so you know what I'll hold my fire and test lab I wouldn't be surprised if a year from not Tesla's back to trading at 95 dollars per share this is a company that essentially is the equivalent of a manic depressive you know you you get everybody in a mood where everybody's buying or you just get everybody turned down in the stock but you're right Tesla is one of those companies where the narrative seems endless when the good times and it seems to have no place to go in the bad tabs and right now the narrative seems endless everybody's piling on there's an upbeat story about what Tesla is going to pull off but you are pricing in not just an expectation that they will dominate the electric car market but they will find other markets to take advantage of with its energy and and and what makes it so difficult to push back is these are plausible stories it could happen but investing on the expectation of it could happen seems not to me a great way of investing because you're just now your best case scenario is you get your expectations delivered your worst case scenario is the companies that's exceptional not just not awesome as you exp as you built in yeah what are the prospects for NVIDIA I mean how could Nvidia scale one of the things that Scott and I have talked about is how Nvidia is not vertically integrated and that is it designs its chips but it doesn't build them it outsources the manufacturing to tsmc um do you think that Nvidia will need to vertically integrate at some point is that the solution to scale like what is the the thing that Nvidia could do that isn't you know 100 market share of the AI chip Market I don't think vertical integration is going to do it for them because that's a lower margin commoditized business and there's a reason they've outsourced it to tsmc which raises an interesting country risk question that I don't even want to go into now because they are entirely dependent on Taiwan summer conductors delivering their chips I think what they need I mean let's face it five years ago if you talked about the AI Market you said well it's not a big Market I don't care five years later people talk about a 300 billion dollar market who knows what the next technological shift will be and what architecture we will need so for it to scale up you actually need a market we don't even know about yet like the crypto Market the gaming Market in the Air Market and that's why I said it's conceivable it could happen because it's happened three times in the last 15 years markets that came out of nowhere that were big markets that Nvidia happened to dominate but you'd actually need something like that I mean there's stock that and I'm not as as upbeat about this about the Omniverse in fact nvidia's CEO talked about the Omnibus metaverse virtual reality the chips you need it's not a 300 billion dollar market that's not big enough so you need a market as big as what the AR Market is seen to be and Nvidia to dominate that market for you to be able to get a get to 400 per share let's stick with AI you wrote that you believe that AI will be negative sum what did you mean by that well I think that when people talk about AI they talk about how it'll cut costs for companies they can replace people with AI and that by cutting costs they're going to make more money and I was saying that people are tired of listening to me say which is if everybody has it nobody has it so if everybody has Ai and they all cut costs the problem is somebody's also going to cut prices and once they start cutting prices everybody ends up with lower costs and lower prices your margins actually decrease because competition takes the upside away and it's with the experience that you can look at this history right when PCS first came out in the 1980s we were told about how companies would get more profitable because you could now use PCS to reduce the number of people working at your company and that reduced cost to turn out as higher profits turned out not to be true everybody at PCS everybody spent more on PCS companies didn't come out as more profitable and each big change well to have promised is this will cut cause increased profits everybody will be better off it is I think the beneficiaries here's might be the consumers so people use Consultants might find themselves paying less for consultants if it's automated if AI can take over that space But I don't think the Consulting companies are going to walk away as more profitable they're going to be a subset of companies that benefit from this growth just like in the PC business the the.com business the social media business so I'm sure there'll be companies like Nvidia that can benefit from the growth of AI but most of the rest of us I think will find that AI doesn't deliver the promised profits that are being that are being offered out there right now because it's not a competitive Advantage everybody will have access to it and I'm not sure that means that anybody walks away with an advantage from this space when you think about the big five when you think about Apple Microsoft Tesla um who else do we have in there meta and throw in Netflix do you see value anywhere do you think I mean it feels as if a small number of stocks have really driven a lot of the indices returns to a certain extent I would argue the indices are are not helpful because they give sort of a false impression of what's actually taking place in the market but when you look at the big guys that we all follow do you see value anywhere or do they all seem fairly fully valued at this point I wouldn't buy any of them I'm lucky enough to own four of the five stocks he named other than Netflix but I think and Tesla but I think that at today's prices I would go out and buy them but having them in my portfolio already I'm not sure I'd sell them either which is a strange thing to say you're saying if you wouldn't buy them at today's prices why won't you sell them at today's prices I have two words California and taxes which kind of hold me back and I think that from that perspective I think that they are in fact fully priced right now but I think there will be chances of those people who regret not buying them there will be a chance again in the future I can almost guarantee it because the nature of these stocks is they will go up and they will go down and there will be times at which there will be decent Investments again but right now I think that they're as fully priced as you can get and when you look across different geographies and different sectors do you see any sectors or geographies or specific names where you think this is a good entry point no I I was actually doing the table on on the breakdown of how 2023 has played out across sectors and it turns out that technology accounts for a big chunk of increase in value and ninety percent of the increase in technology comes from the very top decile of technology companies the largest tech companies so if you look at how much market cap the rest of the market has gained in 2023 it's not that much so many of these companies that got knocked down in 2022 have not really recovered most of that drop in value so I would say look at the left behind companies the sectors that have and I think seven of the 12 S P 500 sectors or the S P sectors actually have either are either flat this year or down this year in spite of the market going up I am I mean I would look carefully at those sectors and and the companies in those sectors because I think those sectors got marked down in 2022 they haven't come back and if we truly escape the potential recession that keep people keep talking about never seems to arrive many of those companies I think are you know undervalued a potential add-ons to your portfolio so I would say look at the look at the companies that have not benefited from the run-up if you think about an entry pointed to the market because I think that's where you're going to see the next leg up in this market one of those companies that has an experience in updraft and I don't know if you've looked at it have you spent any time looking at snap I have off and on since their IPO and you know it's a space I'm reluctant to enter Because online advertising has become this strange cramped space where it's you know it's become zero-sum game so I think snap has done reasonably well in in holding their own but uh you know I am reluctant to go into that space because I think anytime you have a zero-sum game you're going to have you know you can see this with Tesla with uh with Facebook entering Twitter space right now is this is going to be a game and this is why I'm less positive on Google going forward than the other big you know tech companies but I think snap's done a pretty good job Evan Spiegel's got to be given credit for finding a way to kind of hang it there finding a niche which is what he should have gone for from in the first place I think that was a mistake he made at the time of the IPOs to think that he was going to be the next Facebook and and I think he's rediscovered that being a niche company in a large Market is not a bad space to be well I was just going to ask you bought Nvidia in 2018 your thesis sounds like it's probably a little overvalued at this point or at least it's primarily driven by narrative what is your recommendation to existing Nvidia shareholders I mean I I I don't advise other people on what to do because they've got to factor in what they think about Nvidia I can tell you what I did I sold half my holding of Nvidia because I think it's overvalued and I you know I've made back well over I mean seven times what I originally invested in Nvidia collectively I've held on to the other half because I think the momentum in this case is going to mean that the price is not going to collapse 25 or 40 percent but it's on watch which means that if I truly feel that um you know that if there's any more of a run-up that half is also ready to leave my portfolio but I think this you know it's there's an interesting question about whether we treat Investments that are already in our portfolio differently than Investments we plan to make for the first time it's I think something that from a psychological perspective and an investment perspective is worth examining you saw that the Berkshire Hathaway meetings where somebody asked I think Charlie Munger whether he felt comfortable that I think about a third of Berkshire Hathaway's portfolio as an apple and he said I'm completely comfortable I'd wager if you asked him a question would you feel comfortable taking a third of Berkshire Hathaway's money today and invest in one stock he would say no and I think that I'm not saying he's being irrational but I think it's something where we treat Investments that are already in our portfolio differently than Investments we plan to make for the first time and I was the first one to admit that I was being you know internally inconsistent by holding on to half my portfolio but I think that this way I think regret is one of those things you worry about as an investor this way I get to have my cake and eat it too if the stock drops I can say look I sold half my stuff and stock goes up I can say look I held on to F I know that sounds like something that rational people should not do but we're human beings rationality is the first casualty when it comes to investing and this happens to be one of those cases I'm open about the fact that I'm being inconsistent yeah so ask what there's been this unprecedented increase in interest rates does it change I mean obviously valuation interest rates play a big role in how you come to what you think is the right number in terms of valuation but in terms of your actual portfolio Theory and I mean I'll just I'm looking at credit for the first time I've never owned a bond and I'm actually thinking well at my age and my situation and the fact that I get paid five or five and a half percent to hold cash versus 30 bips 18 months ago that maybe I should be thinking about fixed income what are your thoughts about General portfolio Theory I'll tell you from a personal and a marketwide standpoint from a personal standpoint until two years ago when I had money in my brokerage account I just let it sit in cash just wasn't worth the effort of trying to put in tables and make 0.03 percent a year for the last two years I've actually gone to the table auction taken every dollar of cash that I can take out put into tables because when you can make 5.3 percent that's cash you're leaving on the table by not investing the penalty of holding on to cash as cash is suddenly shown up again for the first time in perhaps what 10 or 12 years but from a market-wide perspective I think this is healthy I mean you know I think of markets as this contest between safety capital and risk capital safety capital is capital that goes into the safest parts of markets you know whether it's in the treasury market whether it's in the corporate bond market you're going to Triple A rated bonds and the stock market and money making stable companies risk capital is what goes from the riskiest parts of every Market now and for a decade we've tilted the scales in favor of risk capital because if you're a safety Capital investor you made nothing on cash you made low Returns on safe Investments you push money to risk capital and in my view risk Capital has been too easy for people to access too many businesses have been started and funded because risk Capital was so free and easy for everybody to get and I think as an economy and as a society we are going to pay the price for having risk Capital being so accessible and so easily available to people because I know disruption has been viewed as this great word but there's always a dark sided disruption existing businesses get changed and sometimes ruined and that's fine if the new businesses are coming in are superior in terms of business models but for a decade that wasn't the case we destroyed taxi cabs by bringing in ride sharing but ride sharing as a business hasn't figured out how to make money and in business after business we've allowed disruption to happen with new business models that are not grounded in reality but funded with immense amounts of risk Capital so in my view this this is healthy that finally safety Capital has a place to go and in any healthy Market you need a balance between safety and risk capital and perhaps we find a balance in 2023 between the two so a high flyer that's sort of near to my heart because I think it plays an important role in society and it's one of those companies that's that's declined dramatically to Brands uh Charles Schwab and moderna any thoughts on either of those companies one they're both down about 30 percent here today no Schwab I think I the the consequence is the banking Fiasco was that people started worrying about Schwab is one of the names that was actually thrown around as a bank that might get into trouble so I think it's still recovering I don't think it's in danger in fact I did buy Schwab because of that reason I looked at the banks and said you know what I think Schwab was thrown into this mix for the wrong reasons it's not the kind of bank that I would throw in with First Republic or with this you know Silicon Valley Bank in terms of not having sticky deposits but I think you know so I think Schwab is a good investment from that perspective because I think it's a solid franchise it's a franchise that I don't think it's going to go away moderna I think it's the covet letdown I think that to the extent that bernardo's price got pushed up because of covert at the extent that covet has retreated from the headlines companies that benefited from the covet up search you know Pfizer modern are seeing a letdown the question of whether the letdown is too much depends on how mRNA translates to other if it's just just a vaccine then I think the letdown is legitimate but if I think this is the basis for new medications it could come out in the future I think this might be a good time to take a look at modern and saying they have the you know an entry point into new medications that could be used to generate new drugs new new revenues in the future but I think at least there are good reasons why you saw the drop down but that doesn't mean they can't be good Investments for people who are willing to take the long have long time Horizons so typically when you have a first half year performance like this it bodes well for the IPO market for the second half and in Q2 we had secondary offerings raised triple the amount of money they did in Q2 of last year are there any IPOs that you're excited about or any thoughts on the general RPO Market in the back half of this year the interesting thing about 2023 is well markets have come back risk capital is not IPOs VC money investment and high-yield bonds you're not seeing the upsurge usually see when markets are doing well maybe there's going to be a delayed reaction so maybe the second half is going to be a better year for a better period for its capital in the first half was so I'm keeping my eye on the IPO Market DaVinci Capital Market the the the high yield bond market because that's what you're going to see risk Capital come off the sidelines I'll be honest though I don't think risk capital is going to go back to the way it wasn't the last decade and as I said that's not a bad thing I think it's going to be much more finessed and focused than it used to be so I think if you're going to see IPOs they're going to be businesses that have at least some kind of business model at least that's my hope is that you're not going to see the kinds of companies go public that have no business marketing essentially just lots of users lots of subscribers and lots of promise and hopefully you're not going to see you know the kinds of excesses you saw especially in 2021 where risk capital is so easily inaccessible that people are essentially taking it and creating things that should not have been created in the first place you know developments that are not good for the market in the long term you know I know the the way we take companies public is probably due for a change I know Bill Gurley has talked about direct listings but I think that the change is going to be something that that's going to take time it's it's going to take a while for us to walk away from a century of how we've gone public but I think at the in the next year two years we'll see whether the changes that stick in in how companies go public and I can't resist asking but I'm hoping it's one of the last times I ask what any thoughts on bitcoin or crypto in general the currency that nobody uses in a collectible that doesn't behave like a collectible that part of the story hasn't changed you know in fact what's happened to into Bitcoin this year is I think the worst advertisement for it to be a collectible why because it's gone up as stocks have gone up it goes down when stocks go down this is not the way a collectible is supposed to behave so I'd say that in many yeah it was advertised as a hedge yeah and if it's a hedge it's certainly not behaving like one Lara I think went on in CNBC and said that Bitcoin is digital gold um it's sort of a turnaround from what he was saying a few years ago do you have any thoughts on on his comments before I listened to Larry Fink the less I think about what he actually brings to the markets in terms of actual inside knowledge the guys are fixed in come back just like Michael Bloomberg is and I think once he leaves that domain he really has no idea what he's talking about so I wouldn't take you know the fact that he is 11 trillion dollars gives him this this megaphone but the fact is when he talks about investing in valuation I'm constantly surprised by how little it seems to know about actual investing in markets so uh so if you've seen a lot of Market Cycles just based on your experience do you have any sort of gut feel for the macro climate or where you think the markets are headed over the next six or 12 months yeah I think much of it as it was last year is going to be determined by how inflation continues to behave for the rest of the year I mean so far it's behaved relatively well in terms of what people thought of as a worst case scenario which is keep going up so but I don't think it's going to go back to the two percent or one and a half percent or one percent the FED would like it to see so it's going to be a combination of inflation staying higher than what the FED expects it do but lower than it was last year and how the FED reacts to it that you're going to see affect driving markets for the rest of the year so I'm afraid we're going to go through the cycle of looking at news stories and saying that news is too good and markets go down and like you like you're seeing today whether jobs report looks like it might be much better than expected you know you've got the ADP report coming in higher than expectations I'm afraid you're going to play this game for the rest of the Year good news is going to be bad news and bad news is going to be good news at least for markets and we're going to you know but I think that if nothing else this year should be in further evidence that experts have no idea what they're talking about you know because you know at the start of the Year everybody was guaranteeing us a recession it's almost written in the cards right in fact every Market strategy was predicting markets would go down and markets as they want have shown them all wrong so I the more I watch What markets do and the more I listen to experts tell me what's coming the more inclined I am to trust markets over experts I have one follow-on question to that do you have any thoughts on the yield curve in version aswath I mean we're talking about incoming recession people predicting recession you'd rather trust the markets yield curve inversion would be one of those examples of the markets telling us something but it didn't happen you know what I've always been a skeptic on the UCO I remember three years ago writing a piece on the yield curve and it's as a predictor of markets and I basically concluded that was a very very weak predictor of markets it's all you know it's become this conventional wisdom the yield covers inverted the recession is coming but I you know it's uh historically you look at but I think that's part of the problem in markets is we still hold on to these rules of that even though we have actual data with us now let's play some Moneyball if we think that having short-term rates be higher than long-term rates is bad for the economy let's look at all of the data let's not use these discrete you know rules of thumb or hit the yield curve invests it's almost guaranteed that you're gonna have a recession so I've always been a skeptic and this year has made me even more skeptical about its predictive power asphalt the modern is the Kirchner family chair and finance education and professor of Finance at NYU Stern School of Business where he teaches corporate finance and valuation that's what joins us from San Diego asphalt it's always good to see you thanks for your time thanks God thank you for watching this version of property markets check out our pod feed for office hours on Wednesday and we'll be back with a fresh take on markets every Monday [Music]

Channel: The Prof G Show – Scott Galloway

Views: 293,835

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Id: 4M-8c0-UVNU

Length: 32min 47sec (1967 seconds)

Published: Mon Aug 14 2023