If I had to pick one reason to invest in Nvidia (NASDAQ: NVDA) right now, it would be the company's growth prospects fueled by artificial intelligence (AI). Many investors would no doubt agree with me.
But not all of them. Aswath Damodaran, a finance professor at New York University often called the "Dean of Valuation," disagrees. AI isn't the top reason to buy Nvidia stock, according to Damodaran. However, he thinks another factor could be.
Has Damodaran changed his mind about Nvidia?
Earlier this year, Damodaran posted in X (the app formerly known as Twitter) that Nvidia "is a bridge too far for me." He added that he had halved his position in the stock in the summer of 2023 and was doing so again.
Damodaran built a model to value all the so-called "Magnificent Seven" stocks . He calculated the fair value of Nvidia was $436.34 per share. This was before the company's 10-for-1 stock split , so his fair value translates to $43.63 after the split.
Nvidia is now nearly 2.7 times higher than Damodaran's fair value. Has the "Dean of Valuation" changed his mind about the stock? Not really.
Damodaran still views Nvidia as too expensive to buy. However, he recently offered a hypothetical reason why the stock might be worth buying for some investors.
What could justify buying Nvidia right now
Niels Kaastrup-Larsen interviewed Damodaran for his "Top Traders Unplugged" podcast earlier this month. When the subject of Nvidia arose, the NYU professor offered an interesting take.
Damodaran said that AI doesn't justify Nvidia's market cap of close to $3 trillion. Instead, he said, "It's the expectation that Nvidia will find another business out there that is big and be a first mover there."
Nvidia has a pretty good track record on this front. Damodaran told Kaastrup-Larsen, "It's a company that's managed to find new markets and jump into them ahead of everybody else. It did it with gaming. It did it with crypto. It did it with AI."
Why doesn't Damodaran think AI will provide enough growth potential to justify buying the stock at the current price? He explained, "Even if you believe the Goldman Sachs numbers for AI being a $3 trillion business or a $4 trillion business, the architecture for AI, which is what Nvidia provides, can't be more than a half a trillion of that. And that's actually larger than any of the predictions I've seen for how high the AI chip business has going."
Nvidia's potential new markets
Let's assume Damodaran is right. What new markets could Nvidia enter to make the stock a great pick now? Several possibilities come to mind, many of which the company is already targeting.
For example, quantum computing could represent a huge opportunity within a few years. The metaverse is another possibility.
However, I think Nvidia's greatest potential is in AI -- but an expansion of AI beyond what's available now. Some experts think artificial general intelligence (AGI) could be developed by the end of this decade. Robotaxis using AI technology could become a massive market within a few years. Edge AI -- running AI models on devices locally instead of in the cloud -- could be a key opportunity for Nvidia, especially with consumer devices such as smartphones and smart glasses.
What Damodaran is talking about is called optionality. Nvidia could have lots of optionality in the future. The "Dean of Valuation" isn't confident enough in the company's ability to capitalize on its opportunities to buy the stock. But for those investors who are, Nvidia's current pullback could present a great buying opportunity.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Nvidia. The Motley Fool has a disclosure policy .
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