Aswath Damodaran is an accomplished professor at New York University's Stern School of Business. In particular, Damodaran specializes in valuation -- having written several books on the topic, and often publishing his models and forecasts to the public. Over the years, Damodaran has become known as the "Dean of Valuation" among financial journalists and media personalities.
Last week, Damodaran published a new forecast around Nvidia (NASDAQ: NVDA) -- calling for a 37% drop in share price from current levels (as of Feb. 5).
Below, I'm going to detail Damodaran's logic to help explain why he's calling for such a drop. From there, I'll give my take on why I'm not fully aligned with his bearish forecast.
By now, you're probably familiar with AI's newest talking point -- namely, a Chinese start-up called DeepSeek. DeepSeek is the latest company to emerge in the AI realm, claiming it's developed game-changing applications for a fraction of the cost used to build mainstream models from OpenAI or Anthropic.
In Damodaran's analysis, he states that DeepSeek has "changed the AI story" that will "create a bifurcated AI market, with a segment of low-grade AI products that is commoditized and highly competitive and a segment of premium products."
On the surface, I understand what Damodaran is getting at. If (key word "If") DeepSeek has built a platform on par with or superior to existing AI models and did so with less costly infrastructure, Nvidia's position as the king of the chip realm would appear jeopardized.
To me, the above contention is still more of a theory than anything. It seems that each hour, more stories are publishing about DeepSeek -- many of which are now alleging the start-up was funded with much more than the initial $6 million it claimed. If that's the case, then Nvidia has less to worry about.
But in a world where DeepSeek was built for far less than funding compared to what was plowed into OpenAI and its cohorts, I still don't see such a notion as a bad thing for Nvidia. The reason actually lines up with Damodaran's point of chipware becoming commoditized.
Right now, it's well known that many of Nvidia's largest customers include cloud hyperscalers such as Microsoft, Alphabet, and Amazon. Moreover, big tech giants such as Meta Platforms and Tesla are also some of Nvidia's biggest adopters. What is also known is that many of these companies are investing heavily into internal chipware and working with lower-cost providers, such as Advanced Micro Devices.
Story Continues
The rationale behind these investments is not that Nvidia's chips are falling short of expectations, but rather because these businesses are seeking ways to diversify their own platforms and create cost-saving opportunities in the process. As more chips enter the market, these products would become somewhat commoditized anyway. In my mind, DeepSeek doesn't change the narrative of chips becoming a commodity hardware product at all -- it's reinforcing the idea.
The one area that I will concede looks a bit blurry right now is Nvidia's growth trajectory. I think DeepSeek's arrival is causing investors to consider the inconvenient (but likely) idea that Nvidia's growth could start decelerating at a meaningful pace someday.
While such concerns are legitimate, big tech still appears to be first in line at Nvidia's doorstep for now. Recent comments from Meta CEO Mark Zuckerberg as well as comments from Microsoft's leadership both indicate that investment in AI infrastructure is going to continue for the foreseeable future.
It's difficult to determine precisely how much of that spending will be designated for Nvidia, but I am highly confident that the leading chip manufacturer will remain central to the world's top AI businesses in the future.
What's ironic is that even while Nvidia's largest customers have publicly stated that their capital expenditure (capex) budgets remain robust, shares are still selling off.
NVDA data by YCharts.
In all honesty, I wouldn't be surprised if Nvidia stock continues experiencing drops until the company reports earnings on Feb. 26. By then, I think investors and analysts will have sufficient detail that could signal what AI spend is going to look like across both near- and long-term horizons.
My contrarian take is that during Nvidia's fourth-quarter call, the company's leadership will drive one point above all else: Demand for its chips -- including the latest and most expensive architectures -- remains strong and should continue that way for some time.
As such, I wouldn't be surprised to see shares of Nvidia begin turning around in an epic fashion. For now, I see dips in Nvidia stock as incredible buying opportunities and think the stock will soar much higher from where it is today.
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The "Dean of Valuation" Says Nvidia Stock Could Plunge by 31%. Here's My Contrarian Take on Why DeepSeek Could Fuel It to New Highs, Instead. was originally published by The Motley Fool
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