Aswath Damodaran, a renowned NYU professor known widely as the 'Dean of Valuation,' recently expressed significant skepticism regarding the sustainability of valuations within the artificial intelligence (AI) sector. His cautionary stance centers on a pronounced imbalance between substantial upfront spending on AI infrastructure and the realistic prospects for future earnings from that investment.
In a notable move, Damodaran disclosed that he has completely exited his position in Nvidia Corporation (NASDAQ: NVDA), the largest chipmaker driving AI hardware innovation. In contrast, he continues to hold shares in Microsoft Corporation (NASDAQ: MSFT), indicating a more favorable analysis of the latter’s valuation and business fundamentals.
The Phenomenon of the 'Big Market Delusion'
Damodaran identifies the current enthusiasm around AI as embodying what he terms a “Big Market Delusion.” This phenomenon involves a widespread and optimistic belief among entrepreneurs and investors that they will secure dominant shares of emerging market opportunities. Such expectations often lead to inflated valuations disconnected from the underlying economics.
Specifically, Damodaran projects that the AI industry collectively must eventually produce revenues on the order of two to four trillion dollars just to rationalize the impressive capital inflows now fueling developments, especially in Large Language Models (LLMs). The investment volumes involved are immense, heightening the stakes for those participating in the market.
He further cautions that investors venturing into this domain without rigorous assessment are at risk of substantial losses. In particular, venture capital firms and participants in private equity markets may face exposure to significant downside — potentially left 'holding the bag' when market corrections materialize.
Rationale Behind Nvidia Divestment
While acknowledging Nvidia as an effective and high-performing company, Damodaran reasons that its stock price already assumes an almost flawless future performance scenario. Over the course of four years, he gradually sold his Nvidia shares, completing his total exit by the conclusion of the previous year.
Damodaran characterizes the valuation as "richly priced," indicating that the company would need numerous favorable developments to even break even on current valuations. Although Nvidia occupies a relatively safer position in the AI hierarchy — operating on the “architecture” side, where it profitably retains revenue regardless of customer success — the current market expectations eliminate any margin for error.
Maintaining Confidence in Microsoft
Conversely, Damodaran maintains his stake in Microsoft. He presents a comparatively more 'plausible' pathway for Microsoft to justify its valuation, particularly through its cloud computing segment, which he views as an essential utility in modern technological infrastructure.
This core business provides a stabilizing foundation for Microsoft’s overall valuation, contrasting with the higher volatility and speculative nature of companies solely focused on AI chips. According to Damodaran, the threshold of positive developments required to support Microsoft’s valuation is relatively lower.
He notes additional practical considerations influenced his decision to hold Microsoft shares, including the significant capital gains tax liabilities associated with liquidating long-term positions, particularly as a California resident.
Comparative Market Performance of Nvidia and Microsoft
Examining recent price movements provides context for Damodaran's valuation perspectives. In the year 2026 to date, Microsoft’s shares have experienced a modest decline of approximately 0.56%. Over the past six months and one year, Microsoft’s stock has decreased by 8.24% and 8.22%, respectively.
In contrast, Nvidia’s stock has shown a slightly more pronounced variation. Year-to-date, Nvidia shares fell by 1.26%, though they appreciated by 5.50% over the prior six months and surged 57.46% during the last 12 months.
According to Benzinga’s Edge Stock Rankings, Microsoft exhibits weaker price trend metrics across short, medium, and long-term periods but maintains strong overall quality rankings. Nvidia presents stronger price trend ratings throughout comparable intervals and holds robust growth rankings.
Damodaran's analysis highlights the significant disparities between the valuations of two prominent technology companies involved in AI innovation and the risks inherent in investing in this rapidly evolving market sector. His approach underscores the necessity for investors to weigh valuations carefully against the realistic revenue potential and operational fundamentals of AI-focused enterprises.