Aswath Damodaran: Nvidia And The Power Of Expectations

In this article, Aswath Damodaran delves into the complex interplay between corporate earnings reports, market expectations, and stock price movements, using Nvidia’s recent earnings announcement as a case study.

Damodaran gives a nuanced examination of how earnings reports impact market dynamics, highlighting the complexities involved in interpreting financial information and making investment decisions. It serves as a reminder that successful investing often requires a combination of thorough analysis, personal conviction, and an understanding of market psychology.

Here are the key takeaways:

• The Earnings Expectations Game

Earnings reports serve as crucial information channel between companies and markets. This process involves a delicate dance of expectations, where analysts forecast earnings, companies provide guidance, and markets react to the actual results. Nvidia’s Q2 2025 earnings exemplify this dynamic, as the company beat expectations but still experienced an 8% stock drop.

• Valuation vs. Pricing

Damodaran emphasizes the distinction between valuing an asset based on its fundamentals and pricing an asset based on market demand and supply. This difference is critical in understanding market reactions to earnings reports. While traders focus on earnings surprises and short-term momentum, investors look for information that could alter the company’s long-term narrative.

• Nvidia’s Earnings Implications

The author’s analysis of Nvidia’s earnings report reveals several significant implications: The company can scale up more than previously anticipated. Nvidia has higher sustainable margins than earlier estimates. The firm may be less exposed to chip industry cycles than once thought

These factors led Damodaran to update his valuation model for Nvidia, resulting in a new estimated value of $87 per share. However, this figure still remains 22% below the market price of $106 as of September 5, 2024.

• Investor Approach to Earnings Reports

The article underscores the importance of developing one’s own valuation model and narrative for a company, rather than relying solely on market reactions or analyst expectations. Damodaran reflects on his decision to sell half his Nvidia shares in 2023, viewing it as a balanced approach despite missing out on some potential gains. This personal anecdote illustrates the challenges investors face in making decisions based on their own analysis while navigating market volatility.