In a recent analysis, Aswath Damodaran, a Professor of Finance at NYU’s Stern School of Business renowned for his expertise in corporate finance and equity valuation, has revised his valuation of Nvidia (NVDA) to a stark $78 per share. This represents a significant 34.18% downside from the chipmaker’s recent closing price of $120.07. Damodaran’s revised assessment comes amid what he describes as a “DeepSeek crash” into the AI hardware market, a scenario where lower-cost, commoditized chips could reshape market dynamics.
In his blog post titled ‘DeepSeek crashes the AI Party: Story Break, Change or Shift?’, Damodaran not only revises his valuation but also reveals he has divested half of his Nvidia stock holdings. This decision is underpinned by his belief that the AI chip market is on the cusp of becoming “bifurcated,” with one segment focusing on high-end, specialized chips and another on more accessible, lower-cost alternatives. This bifurcation, he argues, will be influenced by the disruptive entry of companies like DeepSeek, which could lead to a significant reduction in the demand for Nvidia’s premium-priced AI chips.
Damodaran’s valuation drop from $87 in September 2024 to $78 in January 2025 reflects not only the impact of this market disruption but also adjustments for higher risk-free rates and equity risk premiums. Despite Nvidia experiencing a markdown in its stock price, Damodaran finds it to be overvalued even at $123 per share, highlighting a disconnect between his calculated intrinsic value and the market’s current pricing.
The implications of DeepSeek’s entry into the market, according to Damodaran, extend beyond Nvidia to impact a broader ecosystem. Companies that have seen a surge in business due to the AI boom, particularly those in energy and gas sectors supporting the construction of AI data centers, are also at risk. While immediate contracts might not be affected, the long-term commitment to further investments in AI infrastructure could wane as companies reassess their needs in light of new, potentially more cost-effective solutions.
This scenario paints a picture of an AI hardware market potentially moving towards commoditization, where the premium on high-end chips could diminish if lower-cost alternatives prove sufficiently effective. This shift could challenge Nvidia’s market position, which has been buoyed by its dominance in providing high-performance chips for AI applications. Damodaran’s analysis suggests a future where the AI market might not be as lucrative for all its current players, urging investors to look beyond the current hype and consider the sustainability of high valuations in light of technological and market shifts.
Damodaran’s insights often serve as a critical lens through which to view market valuations, offering a counter-narrative to the often exuberant market sentiment surrounding tech giants like Nvidia. His recent valuation adjustment and sale of Nvidia shares underscore a cautious approach to investing in sectors where innovation can quickly alter competitive landscapes and investment returns.
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