Does Deepseek actually mean that Nvidia is over valued?
I wrote this a few days before the 2025-01-27 market crash but could not post it due to rate limits. One change I made is adding actually to the 1st line.
To be clear I have no intention whatsoever of shorting NVDA
Super human AI will run on computers not much more expensive than personal computers but perhaps with highly specialized chips maybe even specialized for the task of running a single AI instance
Investment in AI proper will be small relative to AI directed production
There will be a period of increasing marginal returns from AI; but this will eventually become diminishing marginal returns
Even during the period of increasing marginal returns more $$$ will go to AI directed production than AI proper
Companies that most successfully transition to AI will blow the competition away; some of these companies will have a moat & continue to make high profits. But how can such high profits be justified? Maybe the government needs to take 50% of the shares & create trust funds for its citizens.
Companies that buy up the right kinds of land & natural resources will also do well
Companies that are least affected by AI will benefit b/c of the Baumol effect
So what are the get rick quick schemes? Specialized chips, incorporating AI into production systems for non AI goods, strategically buying up the right land & land rights, AI resistant industries!?
Interesting times maybe too interesting
In conclusion I’m agnostic as to whether Nvidia is or is not over valued but other companies may benefit even more as AI advances. I think it’s more about leadership & seizing opportunities more so than a few companies having an overwhelmingly dominant position.
I freely admit to not really understanding how shares are priced. To me it seems like the value of a share should be related to the expected dividend pay-out of that share over the remaining lifetime of the company, with a discount rate applied on pay-outs that are expected to happen further in the future (IE dividend yields 100 years from now are valued much less than equivalent payments this year). By this measure, justifying the current price sounds hard.
Google says that the annual dividend on Nvidia shares is 0.032%. (Yes, the leading digits are 0.0). So, right now, you get a much better rate of return just leaving your money in your bank’s current account. So, at least by this measure, Nvidia shares are ludicrously over-priced. You could argue that future Nvidia pay outs might be much larger than the historical ones due to some big AI related profits. But, I don’t find this argument convincing. Are future pay outs going to be 100x bigger? It would require a 100-fold yield increase for it to just be competitive with a savings account. If you time discount a little (say those 100-fold increases don’t materialise for 3 years) then it looks even worse.
Now, clearly the world doesn’t value shares according to the same heuristics that make sense to a non-expert like me. For example, the method “time integrate future expected dividend pay outs with some kind of time discounting” tells us that cryptocurrencies are worthless, because they are like shares with zero dividends. But, people clearly do put a nonzero value on bitcoin—and there is no plausible way that many people are that wrong. So they are grasping something that I am missing, and that same thing is probably what allows company shares to be prices so high relative to the dividends.
One quick observation about NVDA dividends that not many people might be aware of: NVDA pays a quarterly dividend of exactly once cent ($0.01) per share. They don’t do this for the “usual” reason companies pay dividends (returning money to shareholders) but because by paying a non-zero dividend at all NVDA becomes part of dividend-paying company indexes and that means that ETFs that follow those indexes will buy NVDA shares. So they technically pay a dividend but for the purposes of valuation you should think of it as a non dividend paying stock.
Regarding the more general question of valuation, if you want to value a company based on how much they are currently distributing to shareholders you need to consider not only dividends but also share buybacks. Buybacks are effectively just a more tax-efficient form of paying dividends. I am not sure what the total numbers are for 2024, but in August for instance NVDA announced a $50 billion buyback.
And of course, the proper measure is not current distribution, but total expected discounted distributions over all time. That’s hard to estimate, but for a company experiencing explosive growth it is surely higher than current distributions.
Even if it actually turns out that “Super human AI will run on computers not much more expensive than personal computers” (which deepseek-r1 made marginally more plausible, but I’d say is still unlikely) it remains true that there will be very large returns to running 100 super human AIs instead of 1, or maybe 1 that’s 100 times larger and smarter.
In other words, demand for hardware capable of running AIs will be very elastic. I don’t see reductions in the costs of running AIs of a given level being bad for expected NVDA future cashflows. They don’t mean we’ll run the same “amount of AI” in less hardware, it will be closer to more AI in same amount of hardware.
Does Deepseek actually mean that Nvidia is over valued?
I wrote this a few days before the 2025-01-27 market crash but could not post it due to rate limits. One change I made is adding actually to the 1st line.
To be clear I have no intention whatsoever of shorting NVDA
Epistemic status—very speculative but not quite a DMT hallucination
Let’s imagine a very different world…
Super human AI will run on computers not much more expensive than personal computers but perhaps with highly specialized chips maybe even specialized for the task of running a single AI instance
Investment in AI proper will be small relative to AI directed production
There will be a period of increasing marginal returns from AI; but this will eventually become diminishing marginal returns
Even during the period of increasing marginal returns more $$$ will go to AI directed production than AI proper
Companies that most successfully transition to AI will blow the competition away; some of these companies will have a moat & continue to make high profits. But how can such high profits be justified? Maybe the government needs to take 50% of the shares & create trust funds for its citizens.
Companies that buy up the right kinds of land & natural resources will also do well
Companies that are least affected by AI will benefit b/c of the Baumol effect
So what are the get rick quick schemes? Specialized chips, incorporating AI into production systems for non AI goods, strategically buying up the right land & land rights, AI resistant industries!?
Interesting times maybe too interesting
In conclusion I’m agnostic as to whether Nvidia is or is not over valued but other companies may benefit even more as AI advances. I think it’s more about leadership & seizing opportunities more so than a few companies having an overwhelmingly dominant position.
Hzn
I freely admit to not really understanding how shares are priced. To me it seems like the value of a share should be related to the expected dividend pay-out of that share over the remaining lifetime of the company, with a discount rate applied on pay-outs that are expected to happen further in the future (IE dividend yields 100 years from now are valued much less than equivalent payments this year). By this measure, justifying the current price sounds hard.
Google says that the annual dividend on Nvidia shares is 0.032%. (Yes, the leading digits are 0.0). So, right now, you get a much better rate of return just leaving your money in your bank’s current account. So, at least by this measure, Nvidia shares are ludicrously over-priced. You could argue that future Nvidia pay outs might be much larger than the historical ones due to some big AI related profits. But, I don’t find this argument convincing. Are future pay outs going to be 100x bigger? It would require a 100-fold yield increase for it to just be competitive with a savings account. If you time discount a little (say those 100-fold increases don’t materialise for 3 years) then it looks even worse.
Now, clearly the world doesn’t value shares according to the same heuristics that make sense to a non-expert like me. For example, the method “time integrate future expected dividend pay outs with some kind of time discounting” tells us that cryptocurrencies are worthless, because they are like shares with zero dividends. But, people clearly do put a nonzero value on bitcoin—and there is no plausible way that many people are that wrong. So they are grasping something that I am missing, and that same thing is probably what allows company shares to be prices so high relative to the dividends.
One quick observation about NVDA dividends that not many people might be aware of: NVDA pays a quarterly dividend of exactly once cent ($0.01) per share. They don’t do this for the “usual” reason companies pay dividends (returning money to shareholders) but because by paying a non-zero dividend at all NVDA becomes part of dividend-paying company indexes and that means that ETFs that follow those indexes will buy NVDA shares. So they technically pay a dividend but for the purposes of valuation you should think of it as a non dividend paying stock.
Regarding the more general question of valuation, if you want to value a company based on how much they are currently distributing to shareholders you need to consider not only dividends but also share buybacks. Buybacks are effectively just a more tax-efficient form of paying dividends. I am not sure what the total numbers are for 2024, but in August for instance NVDA announced a $50 billion buyback.
And of course, the proper measure is not current distribution, but total expected discounted distributions over all time. That’s hard to estimate, but for a company experiencing explosive growth it is surely higher than current distributions.
Stock buybacks! Thank you. That is definitely going to be a big part f the “I am missing something here” I was expressing above.
Even if it actually turns out that “Super human AI will run on computers not much more expensive than personal computers” (which deepseek-r1 made marginally more plausible, but I’d say is still unlikely) it remains true that there will be very large returns to running 100 super human AIs instead of 1, or maybe 1 that’s 100 times larger and smarter.
In other words, demand for hardware capable of running AIs will be very elastic. I don’t see reductions in the costs of running AIs of a given level being bad for expected NVDA future cashflows. They don’t mean we’ll run the same “amount of AI” in less hardware, it will be closer to more AI in same amount of hardware.