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

Economic Impact

Aswath Damodaran argues that AI's promise of cost-cutting and increased profitability may not materialize as expected. He explains that if every company adopts AI, the competitive advantage diminishes, leading to lower costs and prices, ultimately reducing profit margins 1. This phenomenon mirrors past technological shifts, such as the introduction of PCs, which did not result in the anticipated profit increases 1.

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.

--- Aswath Damodaran

Damodaran suggests that while some companies like Nvidia might benefit, the broader market may not see the promised profitability 1.

   

Market Dynamics

The competitive dynamics in the AI market are complex and evolving. Aswath Damodaran discusses how companies like Tesla and Nvidia face unique challenges and opportunities 2. For Nvidia, scaling up may require tapping into new, unforeseen markets, similar to how they dominated the gaming and crypto markets 2.

For it to scale up, you actually need a market we don't even know about yet, like the crypto market, the gaming market, and the air market.

--- Aswath Damodaran

He also notes that vertical integration may not be the solution for Nvidia due to the lower margins and risks associated with manufacturing 2.