The Trouble With Tariffs + Why Palantir Could Dominate AI — ft. Aswath Damodaran

Summary

Prof G Markets Podcast Summary

Episode: The Trouble With Tariffs + Why Palantir Could Dominate AI
Featuring: Aswath Damodaran
Release Date: February 6, 2025
Hosted By: Scott Galloway and Ed Elson
Network: Vox Media Podcast Network

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1. Introduction to Today's Topics

Hosts Scott Galloway and Ed Elson kick off the episode with their characteristic banter, setting a light-hearted tone before delving into the major financial news of the day. The primary focus revolves around the recent tariff announcements, Palantir’s remarkable stock performance, and Vanguard’s strategic fee reductions.

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2. Tariffs and Their Economic Implications [04:30 - 11:18]

Overview: Scott and Ed discuss President Trump's latest tariff measures, including the 25% tariffs on goods from Canada and Mexico, and the sustained 10% tariff on Chinese imports. They analyze the potential short-term benefits versus the long-term repercussions these tariffs may have on international relationships and the U.S. economy.

Key Points:

• Short-Term Gains vs. Long-Term Damage: Scott argues that while tariffs may offer immediate protective measures, they erode decades of goodwill and strain international alliances.

  "This is taking decades of goodwill and trashing it." — Scott Galloway [06:36]

• Market Reaction: Ed notes that despite the political posturing, the market reacted with notable drawdowns in various sectors, including a 3% drop in Apple’s stock.

• Economic Self-Sufficiency: Drawing parallels with Brexit, Ed emphasizes that the U.S. is more self-sufficient than countries like the UK, but still significantly dependent on imports from China, Mexico, and Canada.

  "America is quite self-sufficient, but not completely self-sufficient." — Ed Elson [07:24]

Notable Quote:

"This is literally the definition of stupid. Hurting other people while you hurt yourself." — Scott Galloway [11:18]

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3. Palantir’s Explosive Growth and AI Market Dynamics [11:18 - 21:18]

Overview: Ed highlights Palantir's impressive fourth-quarter revenue and a significant $400 million contract with the U.S. Army, propelling the company's stock to soar by 22%. This surge places Palantir as the 49th most valuable company globally, surpassing giants like Uber and Airbnb combined.

Key Points:

• Stock Performance: Palantir has quintupled its stock value over the past year, defying expectations and establishing itself as a dominant player in the AI sector.

• Market Sentiment: While Ed is astonished by the positive market reaction, Scott questions whether Palantir is overvalued despite its robust financial performance.

  "Is Palantir massively overvalued or is it massively exceeding expectations on every level?" — Scott Galloway [12:42]

• Narrative and Transparency: Scott critiques Palantir's opaque operations and suggests that their success relies on maintaining a sense of mystery, which contrasts with companies that benefit from transparency.

  "Palantir benefits from kind of these known unknowns." — Scott Galloway [14:17]

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4. Vanguard’s Strategic Fee Reductions [16:40 - 20:11]

Overview: The conversation shifts to Vanguard’s significant move to lower expense ratios on their ETFs by an average of 20%, which is projected to save clients approximately $350 million annually.

Key Points:

• Impact of Low Fees: Scott praises Vanguard’s strategy, likening the company to Amazon in the financial services industry, applauding its commitment to passing savings onto consumers.

  "Jack Bogle is a legend and he's probably the most under appreciated icon of business." — Scott Galloway [16:40]

• Active vs. Passive Investing: Ed connects this fee cut to the broader trend of investors shifting from actively managed funds to passive ETFs due to lower costs and comparable performance.

• Investment Advice: The hosts emphasize the critical importance of monitoring expense ratios when selecting investment funds, advocating for the lowest possible fees to maximize long-term returns.

Notable Quote:

"Your fees are their prosperity and there is no connection between returns and the fees you pay." — Scott Galloway [18:50]

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5. In-Depth Analysis with Professor Aswath Damodaran [21:18 - 62:34]

Overview: Professor Aswath Damodaran, a renowned finance expert from NYU Stern School of Business, joins Scott and Ed to provide a deep dive into the current state of the AI market, the emergence of Deep Seek, and the valuation of tech giants like Palantir and Nvidia. He also shares insights on the broader economic implications of tariffs and political influences on major corporations.

a. Deep Seek and the Evolution of the AI Market [21:31 - 43:38]

Key Points:

• Disruption of AI Market Narratives: Damodaran discusses how Deep Seek challenges the prevailing belief that AI dominance requires massive data and computing power.

  "Deep Seek offers a way of getting into the market with a much lower entry cost." — Professor Aswath Damodaran [28:04]

• Market Bifurcation: He posits that the AI market is splitting into premium, data-intensive services and commoditized, rule-based applications, much like consumer markets segregate into high-end and low-cost segments.

• Implications for Investors: The emergence of Deep Seek suggests opportunities in both premium and accessible AI solutions, though navigating this bifurcation requires careful analysis of each company's unique value proposition.

Notable Quote:

"The AI Emperor has definitely sprung a wardrobe malfunction as I described in my post after Deep Seek." — Professor Aswath Damodaran [22:00]

b. Palantir and Nvidia: Valuation Concerns [44:27 - 48:54]

Key Points:

• Palantir’s Unique Position: Damodaran admits difficulty in valuing Palantir due to its secretive operations and dependence on Defense contracts.

  "I have no idea what they actually do. And I'm terrified to ask in case I might end up in Guantanamo Bay." — Professor Aswath Damodaran [42:53]

• Nvidia’s Overvaluation: Despite Deep Seek's impact, Damodaran maintains that Nvidia remains overvalued, reinforcing his caution against investing in high-flying tech stocks without clear valuation metrics.

  "If Nvidia was overvalued in September, in my story, it's even more overvalued now." — Professor Aswath Damodaran [47:55]

c. Tariffs and the Trump Administration’s Economic Policies [48:54 - 52:09]

Key Points:

• Short-Term vs. Long-Term Effects: Damodaran critiques the Trump administration’s tariff strategies, likening them to Brexit by highlighting the potential for long-term economic destabilization.

  "I worry about the fact that you're pulling all these things, you're breaking everything at the same time." — Professor Aswath Damodaran [51:12]

• Economic Self-Sufficiency Revisited: He reiterates the importance of recognizing America’s partial self-sufficiency while cautioning against overreliance on tariffs as a solution to economic challenges.

d. Investing Strategies and Market Concentration [53:27 - 57:55]

Key Points:

• U.S. Market Dominance: Damodaran analyzes the concentration of global capital markets within the U.S., noting that major indices like the S&P 500 consist largely of multinational corporations with significant global revenues.

  "The rest of the world, it takes bank debts... So I'll stay with the 50% which is still an impressive number." — Professor Aswath Damodaran [55:21]

• Comparative Market Analysis: He compares U.S. markets favorably against others like Brazil and Europe, which he views as dominated by mature and less dynamic companies.

• Concerns Over U.S. Concentration: Despite the robustness, Damodaran expresses concerns about the sustainability of such concentration and its potential vulnerabilities.

e. Over-Punished Stocks and Value Traps [57:55 - 61:56]

Key Points:

• Identifying Value Traps: Damodaran discusses companies like Intel and Starbucks that the market has recently punished heavily. He differentiates between those that may recover with new management and those likely to remain in decline.

  "If you don't understand a business, you can't put your money in trading." — Professor Aswath Damodaran [43:38]

• Case Studies:

  • Intel: Potential undervaluation due to skepticism, with possible recovery hinging on strategic management changes.
  • Starbucks: Struggles with legacy costs and operational inefficiencies that may be challenging to rectify.

• Investment Caution: He advises investors to be wary of companies facing systemic issues that new management might not easily resolve, thus avoiding value traps.

Notable Quote:

"This was the story that killed the UK. It was a total catastrophe. And all I'll say is we just cannot let that happen again in America." — Aswath Damodaran [51:12]

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6. Conclusion and Final Thoughts

The episode wraps up with expressions of gratitude towards Professor Damodaran, acknowledgments of the production team, and promotional content for ongoing resources such as Damodaran’s blog and the podcast’s new weekly newsletter. The hosts reinforce the importance of informed investing and staying abreast of market dynamics through credible sources.

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Notable Quotes with Timestamps

• Scott Galloway [06:36]: "This is literally the definition of stupid. Hurting other people while you hurt yourself."

• Professor Aswath Damodaran [22:22]: "The most interesting thing about Deep Seek is how fundamentally it has shifted your perspective on the AI story."

• Scott Galloway [16:40]: "Jack Bogle is a legend and he's probably the most under appreciated icon of business."

• Ed Elson [07:24]: "America is quite self-sufficient, but not completely self-sufficient."

• Professor Aswath Damodaran [28:04]: "Deep Seek offers a way of getting into the market with a much lower entry cost."

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Key Takeaways

1. Tariffs as Double-Edged Swords: While intended to protect domestic industries, tariffs can undermine long-term economic relationships and stability.

2. Palantir’s Market Position: Palantir's extraordinary growth signals strong market confidence, yet questions about valuation and transparency remain.

3. Vanguard’s Fee Leadership: Vanguard continues to set industry standards by aggressively lowering fees, reinforcing the value of low-cost investing.

4. AI Market Evolution: The emergence of Deep Seek indicates a potential bifurcation in the AI market, creating opportunities in both premium and commoditized segments.

5. Investment Prudence: Investors should vigilantly assess expense ratios, company transparency, and the real value propositions of high-growth stocks to avoid value traps.

6. Global Market Dynamics: The concentration of global capital in U.S. markets presents both opportunities and risks, necessitating a nuanced investment approach.

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This comprehensive summary encapsulates the critical discussions, insights, and expert opinions shared in the episode, providing listeners with a clear understanding of the key financial and market dynamics explored by Scott Galloway, Ed Elson, and Professor Aswath Damodaran.

Transcript

[Sponsor]

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[Scott Galloway]

Today's number, 3600. That's the population of tigers in India, more than double the level from a decade ago. True story. My dad used to abandon me at zoos. And then when I'd go to the lost and found and I'd say, dad, why did you abandon me? He said, well, I was hoping your real parents would claim you cannot feel a sepiance. Welcome to Prof. G Markets. I don't have the cameras on of the producers. If the producers laugh, I feel like I have cloud cover. Oh, Claire's not laughing.

[Ed]

It's a rye smile. Does that count?

[Scott Galloway]

Okay, here we go. Welcome to Prop G's markets. Today's episode is presented by Funrise, probably for the last time after they hear that joke.

[Ed]

I doubt it.

[Scott Galloway]

You doubt it? And we're speaking with Aswath Damodaran, professor of finance at NYU Stern School of Business. For those who don't know, Aswath is the Jesus Christ of higher education. He's won best professor award seven of the last eight years. Who won the eighth time? Not me. Not me. Anyways, how are you, Ed? Time for banter.

[Ed]

I'm doing very well. I'd love to hear how you are. You're in a hotel in Orlando, I believe. I believe you're at Disney World. Is that right?

[Scott Galloway]

I'm at the Dolphin Hotel in Disney World, where The rooms are $1,400 a night, but the food and the service are bad. So that makes you feel especially good. I would describe affectionately as Disney World as the seventh circle of hell. This is not where you want to.

[Ed]

Be, especially not with your children, right? You don't have. Your kids aren't with you. You're alone in Disney World, which is actually a very creepy concept.

[Scott Galloway]

I'm alone at Disney World. I just spoke to one of the millions of healthcare companies that is, I don't know, caring for our health. And someone came up to me and introduced me as the CEO of this company. I said, what's the company. He's like, that's the conference we're hosting where wants paying for you to be here. And I'm like, oh, and I love, I love Praxis Health. I'm literally like that guy. But yeah, I'm in Disney World. Took me nine hours to get here last night. Immediately got here so fucking jet lagged I couldn't sleep. So I popped his annex overslept phone blowing up. So I ran down and greeted a group of 3,000 healthcare professionals and still, still for a little bit of, a little bit of a zany hangover. So ask me how the talk went, Ed.

[Ed]

How did the talk go? Scott?

[Scott Galloway]

I don't know. I don't know. Anyways, that's, that's my story.

[Ed]

That's exciting stuff. All right, well, let's get into some headlines here.

[Scott Galloway]

Am I boring you? I'm sorry. Go ahead, go to the headlines. Now is the time to buy.

[Aswath Damodaran]

I hope you have plenty of the wearers all.

[Ed]

President Trump has agreed to delay tariffs on goods from Canada and Mexico for one month. Meanwhile, a 10% tariff on goods from China went into effect Tuesday and Beijing has threatened its own retaliatory measures. Palantir stock soared 22% after the company reported fourth quarter revenue and full year guidance that exceeded expectations. The company also saw strong growth in U.S. commercial and government sales, including a $400 million contract with the U.S. army. Over the past 12 months, the stock has quintupled in and finally, Vanguard has announced its largest fee cut ever, lowering expense ratios on actively managed and index based funds by an average of 20%. That move should save clients about $350 million per year. Scott, your thoughts, beginning with the tariff news? 25% on Canada, 25% on Mexico. We thought that was gonna happen and go into effect. But the tariff on China remains intact. I'll give you a minute.

[Scott Galloway]

Jesus, where's my Xanax? The geopolitical game is a function of power and relationships. We have a lot of power, that's clear. But what we also have is really strong relationships. If you were to say to your spouse, you better do X, Y and Z or I'm leaving you. They might get so worried about you leaving. They might do it. But over the long term, does that help the relationship? We're in a position to invade Canada or start detonating nuclear bombs or moving with heavy artillery and we have the upper hand here. The question is, all right, maybe they give in and say, fine. And then what does that do for the relationship moving forward? I think he got so rolled here. I think they're basically doing shit that they were already gonna do or already doing to calm him down. And then over the long term, the relationship is damaged. Look at Canada. Whenever we go to war or we wanna expel Hussein from Kuwait, they put their young men in women's lives in harm's way because they see us as we're brothers in arms. When we have fires, they send their, you know, bravest and most interesting aviation innovation, the scooper, no questions asked. They don't ask for compensation. They don't posture. I just had them. I called the CEO last night of a company I'm on the board of and he said, we. I said, how's the coordinator? Like, well, it was going great till yesterday. And I had two manufacturing clients, a tire company and an auto parts company, cancel or put the renewal on hold because they're not. They're worried about how the tariffs are going to take impact. So this is, this is threatening people because I'm bigger at the cost of long term relationships. That's before we even go to the head up your ass notion that somehow tariffs work. This is taking decades of goodwill and trashing it. And by the way, the market called this. The market wasn't scared. The market said, this is all posturing. It's gonna get solved. When he realizes this is just stupid.

[Ed]

This will hurt us, kind of. That was, I mean, some serious drawdowns across, you know, the companies that thought they would be directly affected. Even in tech, you saw Apple down like 3%.

[Scott Galloway]

Dude, you're too young to remember what a drawdown is.

[Ed]

Come on. I'm just saying the market reacted. They didn't take it as seriously, to your point, but the market was still like, okay, this is something to think about.

[Scott Galloway]

I think the market basically said, hold my beer. We don't think there's much of a chance this is going to happen. I think this is basically a mob like negotiation, but it's an Al Capone like negotiation, except when he was suffering from raging syphilis. He's like, it's not even Tony Soprano. It's Al Capone raging syphilis type of negotiation strategy. Your thoughts?

[Ed]

So this whole thing reminds me of being in London in the summer of 2016 when Brexit was on the table and the issues were very different, but the fundamental sentiment was the same. Where the Brits basically said, we are an extremely powerful economic force and we have all of these kind of unnecessary ties to other countries, specifically the eu and we could just be doing all of this on our own. The result of that move was an absolute decimation of the UK's economy because the Brits basically overestimated how powerful they actually are. And it turns out we actually did need all of that stuff from Europe. We were not self sufficient in the way we thought we were. And it turned out to be the greatest economic mistake in modern British history. So I look at this tariff stuff and it gets me anxious because it feels a lot like Brexit. And I think the question America has to ask itself, very honestly, the question that Britain did not ask itself is how self sufficient are we really? You know, could we actually live without Canada? Could we actually live without Mexico and without China? Would that actually work for us? And I've been looking into this question and the answer is a little bit more complicated than you might think. Because America, unlike the uk, is one of the most self sufficient nations in the world. If you look at our imports as a percentage of our overall GDP, it makes up around 14%. And you look at the UK, that number is 32%. So it's low, but it's also not crazy low. You've got similar numbers in Argentina, similar numbers in Brazil, similar numbers in China. So in other words, America is quite self sufficient, but not completely self sufficient. And then the question becomes even more interesting when you look at the distribution of imports in America, because it turns out that of the imports that we do bring in, we are crazy reliant on three countries. And those countries are China, Mexico and Canada. They alone supply almost half of the imports that come into America. And if you look at specific products, that number gets even higher. So for crude oil, for example, they supply 70% of the imported oil to America. For toilet paper it's 85%. For tomatoes it's 99%. So I think the answer here is yes, America, while it needs other countries less than Britain, it does need other countries, specifically those three countries. And if these tariffs were to go into effect in one year, it's estimated it would cost us around $300 billion, which translates for the average US household to an additional two and a half thousand dollars in expenses every year. Which basically means that the average American family should just expect, if these tariffs go into effect, we'll see they should expect a 3% increase in their monthly payments, which is a lot of money. So I just want to make sure we're all clear on how powerful America actually is. It's very, very powerful. But it's not all powerful. It's not Completely powerful. And the worst situation would be for America to make the same mistake the UK did, where you overestimate your power. You get carried away with all this patriotism in self sufficiency. You ignore the fact that you're actually part of a global, and then it comes back to bite you in the worst way possible, which is even higher prices and lower growth. I literally watched it happen in real time to Britain. It killed the country. It was a total catastrophe. And all I'll say is we just cannot let that happen again in America.

[Scott Galloway]

This is literally the definition of stupid. Hurting other people while you hurt yourself.

[Ed]

Let's talk about Palantir. I just want to point out the position Palantir was in heading into these earnings. They were up 400% in the past year, 1300% in the past two years, trading at 75 times sales. Compare that to Nvidia, which trades at 26 times sales. The expectations for Palantir literally could not have been higher. And the only way they could have come out of this earnings call with a higher stock price would be to just shatter expectations, which is not what I expected. I was expecting a drawdown. I was completely wrong. Monster quarter. They beat on revenue by 6%. They beat on guidance by 8%. They beat on earnings by 27%. They beat on free cash flow by 70%. This is probably the best quarter of 2025 from an expectations perspective. You've got this already hyped up AI company. Everyone's waiting for them to slip up and then suddenly they come out and do this. I'm kind of blown away by Palantir, now worth almost a quarter of a trillion dollars in Market Cap. 49th Most Valuable Company in the world. And get this, more valuable than Uber and Airbnb combined. So Palantir just absolutely crushing. Any reactions to their latest earnings call?

[Scott Galloway]

Well, the question is, is Palantir massively overvalued or is it massively exceeding expectations on every level? And the answer is yes. There's also. I've always felt Palantir benefits from what we don't know. Typically in a company, you want to be as transparent as possible, such that you develop credibility. You say when things are bad, you put out earnings revisions. If you think you're going to have a bad quarter because the market likes honesty, it appreciates it. And then when you say things are good, it takes. It trusts you. In the case of Palantir, they benefit from kind of these known unknowns. And that is, we work with the Defense Department. A lot of what we do is super secret. And there's this kind of spy versus spy James Bondfield of the company. And also the narrative here. I would argue the CEO is the best storyteller probably in terms of nuance in the world of business right now. Walks around doing unusual earnings calls that feel very authentic. Goes on Bill Maher Palantir zagged. When everyone else zigged, they said, we're totally, we're absolutely going to work with the US Department of Defense. There are a lot of enemies out there. They drape themselves in the flag. And I think there is a large market that is not represented by kind of what I'll call a lot of virtue signaling in tech companies pretending that they cared what their employees thought. That was my favorite. Bring your full self to work. Right? That's what they told these people. Now be clear. And this is actually I'm trying to be. God, I sound so Boomerash. And get off my long rhyme now.

[Ed]

You do. You do indeed.

[Scott Galloway]

Yeah, but I mean this sincerely. My advice to young people would be the following. Keep your politics out of the office. No one cares. When a lot of people started talking about progressive ideals, and I think they were well meaning, at least an employee base, people would say come up to you and say, you're a leader. Thank you for that. Thank you for pointing it out. And then memo to self, lay off this person in the next layoff. And even if your CEO is pretending to give a good goddamn about Juneteenth, I don't think they do. I think they're virtue signaling and trying to attract employees who they think are progressive. And the moment they're asked to actually have the rubber meets the road and maybe have a board and an executive management team that looks more like their customer base or looks more like their employee base, if it costs them any money, they're not going to do it. And so Palantir zig the other way. And I think the market has responded in spades. And I gotta think also they're in the right place at the right time. I gotta think the Trump administration loves these guys.

[Ed]

Interestingly, the CEO donated to Kamala, which I just found pretty fascinating because he seems like such a. You think he's more of a Trump guy, which is interesting, but I totally agree with him. All that. Let's talk about Vanguard. Vanguard is lowering the expense ratios on their ETFs. We talk about how important this is a lot. I wonder how much this has to do with this active versus passive investing trend we've been talking about. This idea that everyone is starting to realize that the fees, the higher fees on active investment funds just aren't worth it. You might as well go passive instead where the fees are a lot lower. And that's why we saw last year almost $200 billion allocated out of active funds and almost a trillion dollars in inflows invested into passive funds. So I wonder if this is sort of a response to that trend, because the funds that are going to have the biggest price reductions here are going to be the active funds. In other words, I wonder if Vanguard is saying, okay, we're seeing lower demand in actives, so we're going to lower our prices here. But I do think it all gets back to a very simple point, which is expense ratios are everything. I mean, before you invest in anything, you, you have to look at the management fees, you have to look at the expense ratios. And it's, you know, good news here that one of the biggest asset managers is deciding to lower their fees across the board.

[Scott Galloway]

Vanguard is the Amazon of the financial services industry. Jack Bogle is a legend and he's probably the most under appreciated icon of business. And that was before it was cool. He said, you don't need to find a needle in the haystack, buy the whole haystack. And the myth that CNBC mutual funds, the entire alternative investment universe, has tried to con the American public with is that they have people who can find the needle on the haystack. And everything I've learned over 30 years of working with hedge funds, private equity people working with people ask a lot to motor in, is for the most part, nobody has any fucking idea. And what you need to do is diversify and find the lowest cost fund hands down. And people don't realize because they think, oh, it's only 1% a year or 2% a year, and a mutual fund that's branded, that advertises on cnbc, that eats up about a third of your returns over the long term. And these guys, what have they done similar to Amazon or similar to Walmart, as they grow in scale, they pass on their savings to the consumer. And I have outperformed the market in my own personal investments. And it's not because I'm better. I'm convinced that, and this is a position of privilege, but because I work with these funds, I have one rule. I don't pay fees. People say, we'd like to get you involved in a company, would you be an advisor? And if I co invest, I have a lot of friends in the hedge fund business. And they call me and say, love to have you as a limited. I'm starting a fund. I'm like, I don't pay fees. And that has made such a difference in my returns. Because what people don't realize is if they're paying, if they're clipping 1 to 2% a year over 10 years, that's.

[Ed]

Why they're all rich. Yeah, they're not investing that well. They're just scooping up a fee.

[Scott Galloway]

If you took the entire alternative investments universe and aggregated it all, it's underperformed the market by their fees. So I love Vanguard. I think they've done. They're the definition of smart. They've helped themselves. They continue to aggregate more and more assets and pass those assets on to consumers. And the lesson here is the following, folks, your fees are their prosperity and there is no connection between returns and the fees you pay.

[Ed]

Exactly. And I just want to give us, our listeners, some examples of some great low cost ETFs that you can just go out and buy. So some of the lowest cost ETFs we found here. One is Voo. That's Vanguard's S&P 500 ETF tracker. The expense ratio is 0.03%. SPLG is another one at 0.02%. Those both track the S&P 500. If you want a total stock market ETF that is also very, very low cost, 0.03%, try VTI or ITOT. These are all extremely low cost ETF options. But the point here is you need to look at the expense ratio. You need to be checking the expense ratio before you buy, and you also need to be checking the expense ratio as you own. You just want to make sure that those expense ratios aren't going up, in which case you need to start looking at another etf. But definitely go with the lowest cost ETF possible. And those examples are some good ones that you can go with. We'll be right back after the break for our conversation with Professor Aswath Demoderin. If you're enjoying the show so far and you haven't subscribed, be sure to give proftumarkets a follow wherever you get your podcasts.

[Sponsor]

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[Ed]

Welcome back. Here's our conversation with Professor Aswath Demodoran, the Kirchner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business. Aswath, thank you for joining us again on proftimoc.

[Professor Damodaran]

Thank you for having me, Ed.

[Ed]

So I would love to start with Deepseek, which you recently wrote an article on. Just give us your headline reactions on what happened with Deepseek and what you think it means for the rest of the AI market.

[Aswath Damodaran]

You know, it's because I am a teacher first and an investor second.

[Professor Damodaran]

I'm always torn when something like Deep Seek happens because it kind of brings.

[Aswath Damodaran]

Home something I've been trying to get.

[Professor Damodaran]

Through in class so much more effectively.

[Aswath Damodaran]

Than words I could have used. In fact, the weekend before Deep Seek showed up on our radar, I taught my first undergraduate valuation class and as Scott knows, I mean, I teach in Paulson Auditorium, the 35021 year olds, 2021 year olds in there and they're eager to learn about valuation.

[Professor Damodaran]

So I talked about what valuation is.

[Aswath Damodaran]

They expecting to become Excel ninjas. And I never opened an Excel spreadsheet. I talk about how every valuation is a bridge between stories and numbers. And then as an add on I said, you're going to be telling a story about a company and valuing the company. But here's what you have to be ready for. Things will happen out there because you're valuing a real company in real time. That will change your story.

[Professor Damodaran]

And the reaction I could say from the faces was how much can change in a story in 15 weeks? And then over the weekend, Deep Seek happens. And in many ways it's changed the AI's story. So to me, the most interesting thing about Deep SEQ is Not the company or its Chinese origins, the fact that they built it over 50. A lot of that might be fiction. It's PR. It's at how fundamentally it has shifted your perspective on the AI story. In fact, I used the Emperor's new clothes as an analogy and I said how the Emperor's new clothes. Nobody was willing to call attention to the fact that he had no clothes. It's not that the AI Emperor has no clothes of Deep Seek, but the AI Emperor has definitely sprung a wardrobe malfunction as I described in my post after Deep Seek because people are saying maybe that part of the story is not true anymore. So to me it's capacity to change this huge story that's been driving markets over the last couple of years has been amazing to watch. Even though part of my investor side felt the pain of this is what it did to my Nvidia stock price.

[Ed]

So take us through exactly what that AI story was before deepseek and what it is now after Deep Seek.

[Professor Damodaran]

The pre deepseek AI story had three parts to it. The starting part first is that the.

[Aswath Damodaran]

Market for AI products and services is going to be incredibly huge.

[Professor Damodaran]

The reason that's kind of tricky is.

[Aswath Damodaran]

There'S no product or service right now that's out there that actually makes money, but the assumption is going to be huge.

[Professor Damodaran]

So that's the starting point that we'll all subscribe into some and we'll pay for it and we'll pay high prices for it. That was the starting point and people started throwing numbers around in the trillions of dollars that this AI product and service market be.

[Aswath Damodaran]

3 trillion, 4 trillion, 5 trillion.

[Professor Damodaran]

That's the end of the story.

[Aswath Damodaran]

The start of the story is to.

[Professor Damodaran]

Enter the market you needed two things.

[Aswath Damodaran]

One is insanely powerful computers powered by chips that could be made that were made efficiently by only one company in the world. Nvidia basically had a lead and insane amounts of data that the entry cost was going to be huge and the.

[Professor Damodaran]

Middle part actually falls out of those.

[Aswath Damodaran]

Two other parts which is the entry costs are huge and the end market is going to be immense. That there'd be a few big winners making immense amounts of money because they'd have paid the entry cost, entered the market now be able to sell their products and services. That was a dream that's been driving markets since the November 30th of 2022. The day ChatGPT showed up, what Deep Seq said was maybe there's a different way to play the story. So the post deepseek story can be different. But the pre deepseek story that drove not just the value of Nvidia, but the Constellation energy, I mean, a whole set of companies involved in building the architecture as well as companies that might or might not be able to produce in products and services. Was the story that you see driving markets through Friday before Deep Seek showing up?

[Ed]

Yeah, this is, I love describing it as two competing stories because I think another dynamic that we have here that I am personally struggling with, you've got the sort of Nvidia OpenAI American story, let's call it, and then you've got this Deep Seek, lower cost China story. I don't know which story to believe. And that's part of my problem. You know, there's the issue of how much did they actually spend on this thing? How many GPUs did they actually have? And then there's this new wrinkle which is this question of legality where OpenAI is saying, well, actually they stole our model, we think, and that's illegal. And in which case it's like, okay, which story are you supposed to go with?

[Professor Damodaran]

That's why I think the story is not about Deep Seq or China. It's about asking a question about are the entry requirements for AI products and services as high as the story was? So this has nothing to do with us or China, right? That was the story told. And I'll tell you, one of the reasons I was wary of that story is I work with people who keep coming up with stuff to do. Valuations, investing, accounting with automated products. They might not have called it AI, but think of it as early versions of AI. So I can see an AI accounting product. And an AI accounting product doesn't require any data. You don't need to know how every.

[Aswath Damodaran]

Accountant in history has ever accounted.

[Professor Damodaran]

All you need are the rules. And the reality also is you don't need supercomputers. You can get there with fairly low power computers. So the original AI story I was.

[Aswath Damodaran]

Being told, to build an accounting AI.

[Professor Damodaran]

You still need the Nvidia chips and lots of data. And what Deepseek did was open the door to all of those people who.

[Aswath Damodaran]

Are skeptical saying, you know what, at least for a segment of the AI.

[Professor Damodaran]

Product and service market, I'm gonna call them, I call them low grade in.

[Aswath Damodaran]

My post, I'll call them low intensity products and services. Products that don't require huge amounts of data. They're rule based, not intuition based and.

[Professor Damodaran]

Don'T require incredible computing power.

[Aswath Damodaran]

Deepseek offers a way of getting into the market with a much lower entry cost. So you know what? Both things can be true. The old AI story still applies for the Palantir version of AI which requires huge amounts of data. It's more intuitive, it has to build on data and needs supercomputing. But what I think it's done is it's created a bifurcated AI market where one segment is going to stay premium or the old story will apply and there'll be a few big winners with huge computing power and lots of data and a different market for AI products and services, this low intensity stuff, which will be more commoditized because a lot more people enter that market. It's great for customers because this is good news no matter how you slice it for customers, because you're now gonna get access to AI products and services at a lower cost, but it's going to be much more difficult to make money in that segment. That to me is the takeaway from this because you're absolutely right. There are things that'll come out about Deep Sea that it spent a billion dollars rather than 6 million, that it did use 150 Nvidia chips to essentially get to where it is that it might have. I don't want to use word stolen because that will already require me to pass judgment.

[Ed]

Distilled is the word they're using.

[Aswath Damodaran]

That they borrowed data from the.

[Scott Galloway]

Inspired by.

[Aswath Damodaran]

Inspired by and that the Chinese government is nefarious. All of those things might actually play out here and Deep Sea could disappear tomorrow. But guess what? The story, the emperor's new clothes are basically not new clothes anymore. The wardrobe malfunction has told us that the old AI story is not going to hold. And that I think is the change that one weekend wrought on the entire AI story. And it's healthy, I think, because one of the problems when you have these big buzzwords driving what markets do social.

[Professor Damodaran]

Media, Internet, PCs is early in the process use the buzzword to justify everything. Why should I pay too much? It's an AI company. And I think we were every one of these buzzwords. There was this moment that I call this the bar mitzvah moment where you.

[Aswath Damodaran]

Wake up and you say, hey, where's.

[Professor Damodaran]

The grown up part of this story? I think this was a good part for the AI story because it says, look, there is no AI company.

[Aswath Damodaran]

Are you an AI architecture company?

[Professor Damodaran]

A software? So we will, if we're sensible, we'll start asking questions about AI that I.

[Aswath Damodaran]

Think are much healthier questions. Hopefully after deep seq than before.

[Scott Galloway]

So aswath, we both teach at the same institution and you know, I don't know if you have this. I have a series of go tos where I think okay, I gotta build a class around this because it's actual something resembling insight. And one of those is what I think I still hold onto. And that is almost every consumer market ultimately bifurcates into a Walmart and a Tiffany and that is there's an aspirational high end model and then there's a, you know, lowest cost, massive selection. And also that somewhere in between the companies that actually grow the fastest and have created the most shareholder value over a short period of time are the old navies. 80% of the market leader for 50% of the price. Southwest, largest market cap of any US airline. 80% of Delta, American, United for, you know, 50 or 60% of the price. One is this essentially the market going Walmart and Tiffany and or two is deep seek the potentially the old navy of AI and is going to grow its value faster than the rest of them.

[Professor Damodaran]

I think actually the market is going to have three segments to it. One is the Tiffany, the WALALMART and the third is we got these platform players right, Microsoft, meta, Google and there is this possibility that for them AI will be a freebie, that the products and service will be freebies. They offer people to stay on their platform more. So that's why I said it's good news for customers because if you're a meta customer of Microsoft, my guess is there's going to be freebie stuff that's coming. That sounds free, but it's getting you to spend 15 minutes more on LinkedIn or Office. I do think that within the commoditized market you're right, there will be companies that find other competitive advantages because let's face it, brand name and other things were created because you are in a commoditized market. Perfume is perfume and the way you separated yourself was you created some kind of illusion that you. I wouldn't be surprised if you got this middle segment in the AI market of companies that provide commoditized AI products and services, but attach a name to it that makes it feel like you're getting something more, almost a brand name version of AI. So I think the retail market is a great way to think about how the AI product and service market is going to end up separating. And I think that the winners and.

[Aswath Damodaran]

Losers are going to reflect what you've seen in the retail market as well is how do you come up with Competitive advantages. When entry costs are low, you're essentially offering the same thing that everybody else is, but you gotta get people to.

[Professor Damodaran]

Pay a higher price for your product. So I think it'd be fun to.

[Aswath Damodaran]

Take the retail analogy and play it out there.

[Professor Damodaran]

Whether the reason I'm a little wary.

[Aswath Damodaran]

About deepsea being the Old Navy, because as Ed pointed out, there are all these things that make me suspicious of whether the Deep Seek story is being fully told. Now, I'll be quite honest. If I were Deep Seek, I'd have laid all my cards on the table. If it cost them a billion dollars, I'd have said it costed us a billion dollars. If they'd used 150 Nvidia chips, I'd say we used 150 Nvidia chips. If they stole OpenAI data, that's not. That's not fixable. But if they borrow data, I would frame it as such. Because even if they spent a billion and had 150 Nvidia chips, it's still impressive that they've churned out a product for a lot less than Open AI. I mean, there's an old saying, it's good to have the competition, the types of competition, because in the case of Open Deep Seq, there best advantage is they're competing against OpenAI and OpenAI is a corporate governance fiasco. I don't trust Sam Altman further than I can throw him. And that might actually benefit Deep Seek because it's not like we trust ChatGPT and OpenAI to do the right thing for us because there's nothing there to base that trust on. So in many ways, the opening here is the existing players are so unreliable and untrustworthy to begin with that even if you have issues with Deep Seq, you can say, I can live with that because I've lived with that with OpenAI and what the big tech companies are doing with it. So I think we're early in this game, but there's a lot more rocky stuff coming ahead of us in terms of how this market will play out. But I wouldn't be surprised if none of the names we've talked about ends up being one of the winners. This is like being in the Internet market in 1995. Nobody mentioned Amazon at that time. The ultimate winner we're talking about will AOL win this game or will Cisco win the game?

[Scott Galloway]

Lycos, AltaVista, Hotmail. I find it hilarious that Sam Altman is crying foul and saying they stole. It's like Hannibal Lecter accusing people of eating Too much meat. I mean it just. Karma's a bitch. I just think it's hilarious it even has the backbone to accuse other people of stealing data. Anyway, we were blown away. We had Robert Armstrong, the markets analyst from the Financial Times and he outlined a thesis that has just entirely changed my view on this and I want to lay it out and get your response. I came to Orlando last night in an aircraft that skirted along the surface of the atmosphere at 8/10 the speed of sound has changed the world. I didn't have to get on a steamship like my parents for 14 days and get sick or seasick. I didn't 150 years ago have to get in a wagon and end up eating each other and dying of scurvy over the Rockies. It has changed the world massively. Unbelievable technological breakthrough. Airlines have lost more money than they've made. PCs change the world. Very few PC makers have made any money. There are a set of companies and technologies where the majority of the value accretes to stakeholders versus a small number of shareholders could deep seek signal that AI and I think this would be a good thing. Might be more like the airline and the PC industry than search or social where in fact the winners are going to be the general public and no one or small number of companies is going to be able to capture all of the value.

[Professor Damodaran]

I think for the commoditized segment that may very well be the end game. But I do believe a portion of AI where you use exclusive data and superpower computers, I think Palantir might be a winner in that space because I can't imagine a way that a competitor is going to come in. Because the airline business in a sense what killed it was open entry and the fact that your weakest companies never left the game. I mean that's the problem with the airline business is you kept the weakest players going and new people kept coming in. There was no way this business could fix itself. Since 1977 the business has gone back. You know, between bankruptcy and making billions, it's not figured out a way to make money. I do think of the premium AI market and it'll be the data plus supercomputing that gives those companies the advantage. There will be winners in the commoditized market. It's entirely possible that what you're going to get is competition that essentially drives the the businesses in this space into not into bankruptcy but into this period where they keep flirting with bankruptcy while consumers benefit. But consumer benefits come with side costs.

[Aswath Damodaran]

Which is we're all better off.

[Professor Damodaran]

But there's also side costs we create for the society. And I think that's the part that concerns me. We might all have AI products and services. Often it costs pretty close to nothing. Will that make us happier?

[Aswath Damodaran]

I mean, I think that's a question that I don't. I mean, it's a cultural question, not an economic question. But I've heard these promises before from tech people that they're gonna take our drudgery off.

[Professor Damodaran]

And that's why the last part of my post was about, hey, every time.

[Aswath Damodaran]

You get these new technologies, I'm told that this is gonna make my life simpler, less drudgery and happier.

[Professor Damodaran]

And every time I look back and say, really? And I worry about that AI effect on all of us, what exactly are.

[Aswath Damodaran]

We going to be looking back at 15 years from now? As Scott and I both know, Jonathan.

[Professor Damodaran]

Haidt, he's pointed out that the end effect of smartphones might not be that you can get DoorDash delivered in 15 minutes.

[Aswath Damodaran]

It might be that your teenager has.

[Professor Damodaran]

A greater chance of going through depression because of the exposure to smartphones. The net effect, I think, with AI that I worry about is the effect on society overall. I'm not equipped to think through all of that, but I am old enough to remember the promises made with each technological shift and what we end up seeing as a result of it.

[Ed]

We'll be right back.

[Sponsor]

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[Ed]

We're back with Prof. G Markets. You mentioned Palantir there, which just had a blowout Quarter. It is now the 49th most valuable company in the world. It's up around, I want to say, 1,500% in the past two years. I kind of expected you to walk in and say it's way overvalued, but you sound a little bit bullish maybe.

[Professor Damodaran]

I'll be quite honest. It's a one usually I never say never with the company. I view it as a challenge when the company, Palantir is the one company that I kind of hold off on fully valuing. Cause I'll be quite honest, I have no idea what they actually do. And I'm terrified to ask in case I might end up in Guantanamo Bay, because it's the nature of what they do, and especially on their Defense Secret Service side is it's. But if you were building a prototype of a premium AI product, it would look a lot like Palantir, right? It would be data that is exclusive to you. It would be require intuitive components to the data because they're trying to second guess what might happen and they're gaming out wartime activities. This, you know, you can't just feed it roots, you got to feed it in much. You need supercomputers and you have very sticky customers because once the Defense Department chooses you, it's not like a competitor can come and say, I'll offer 20% less because there are all these links.

[Aswath Damodaran]

You built in that are almost unbreakable.

[Professor Damodaran]

So does it justify a 1500% price increase?

[Aswath Damodaran]

I don't know. But I'm willing to listen to somebody who says it is. But as an investor, I need to.

[Professor Damodaran]

At least have at least a sense.

[Aswath Damodaran]

Of what a company actually does that makes it unique to be able to bet on it. And Palantir has always been this bridge too far for me. It's one of the few companies in the world where I look at and say, interesting company, fascinating.

[Professor Damodaran]

But as an investor, I can't buy.

[Aswath Damodaran]

You as a business because I really don't know what to do. I could trade it, but I'm not a trader. Right. Trading is just looking for a higher price. Momentum can carry you there. But to me, it is exactly the kind of prototype for this premium AI market that I'm thinking about where there will be companies that find a space like Palantir and then harvest that space to make as much money as they can.

[Ed]

Do you think it's possible that the rest of Wall street feels similarly as you do, and therefore that's why we're seeing this price increase? Because is it possible that basically Most of Wall street doesn't really understand what Palantir is or does, and that's what kind of excites them about the company.

[Aswath Damodaran]

And that's the difference between investing and trading. Investing. If you don't understand a business, you can't put your money in trading. All you need to do is a momentum in your direction. So if you believe there's a big enough story, and as long as there are enough players who believe the story, you're going to be able to sell at a higher price. So Wall street may be trading on the fact that Palantir is one of the few players you can point to and say, that guy has a premium product. Other people think like me, because you're just making guess on whether other people stay with the herd. So I believe that Palantir is one of the few companies with a tangible product or service that you can point to and say they'll find a way to make money on it because it is unique and different.

[Ed]

We need to get the Department of Defense on the line, get a product review from them to figure out what is going.

[Aswath Damodaran]

And the problem is, once you lock those guys in, I mean, they're going to keep paying. I mean, it's a nice continuing income model, which is a nice customer base to have.

[Scott Galloway]

No, I've worked with the government. They're the worst business prospects in the world, but they're the best clients. Because if you can figure out a way to get in there, it's hard to leave. Just real quick, I was going to. Part of this conversation was, okay, two most overvalued stocks in the world. One, Palantir, and you've convinced me. And don't trade it. It's just there's, there's just too many known unknowns. My other one, this is a cross I'm going to die on here. Now do Tesla.

[Aswath Damodaran]

Tesla's become as much of a political bet as it is an electric car bet. And I think that worries me. I mean, I, I've invested before Tesla. I've invested in companies and other countries where connections with who's in power was a big factor. I talk about the Adani Enterprises in India where you're making a bet on the company, but you're also making a bet on whether the bjp, which is the ruling party in India, will win the next election because the two are tied together. Historically, that's not been the issue in US Companies, which have tended to give to both sides of the aisle. So you're not buying a Republican company or a Democratic company. You're buying the company. I think Tesla kind of broke that. That rule and effectively has. It's not Tesla that broke the rule, it's Elon. And by making a company that's all about. That's personality driven.

[Professor Damodaran]

Now, this morning in class, I was doing my certificate class, I asked somebody in my class, do you like Elon? And he said, why do you care? I said, you tell me what you think about Elon Musk, I'll tell you whether you're likely to find Tesla to be undervalued or overvalued. It's come to that point where this is bec. And that's troublesome as an investor, Right. This is now less to do with electric cars and automated driving. I made a good bet buying Tesla last year at 170, but at 400, the question I'm asking is, what am I holding now? Am I holding a bet on the.

[Aswath Damodaran]

Next great electric car company in the.

[Professor Damodaran]

World, or am I holding a bet on what Elon Musk is going to do to the US government? I'm not sure what I'm betting on right now. So I think it's reached a point where when you think about Tesla, your narrative is all over the place because you now have other players, which are.

[Aswath Damodaran]

Political players, pushing into the story.

[Professor Damodaran]

And I've never been good with political companies.

[Ed]

And we also gotta get your thoughts on Nvidia. I think it was September of last year, you said Nvidia was overvalued. It was trading at around $109 per share. It's now at around 1:15,116. I assume you still think it's overvalued.

[Professor Damodaran]

Well, my value went the other direction. It went from 87 down to 78 because of deep Sea. Basically. If it's a segment of the market that's going to be premium AI, and I'm being generous and I make the segment 300 billion for AI chips rather than 500 billion. It is going to have consequences for Nvidia, and it played out as a lower value, but the price is actually higher than it was. So if it was overvalued in September, it's even more overvalued now, which is one reason I have, at some point in time I have to act on my valuations. I sold half my Nvidia in 2023. I'm selling my other half of what I've left. I'm still holding on to a little bit of it because it's psychological. I just, you know, it's this, this regret factor that led me to kind of hold half is that way. Either way, I can point to something I've done and say I'm okay with it. And that. That's my psychology. I need that to make sure that, that it doesn't spill over into something else. I do. So it feels more overvalued to me. But it's my story, and I want to, you know, I don't. That's why I said this is not investment advice. I'll give you my frame, a different perspective on what Deepseek did, and maybe your conclusion would be deep seek actually made Nvidia more valuable. I have a tough time figuring out what that story would be, but I think that the game is on. And I think at this point, I think if Nvidia was overvalued in September, in my story, it's even more overvalued now.

[Ed]

To pivot us to Trump land, do you have any views on tariffs and what Trump has done with tariffs, specifically the tariffs on Canada and Mexico and China?

[Aswath Damodaran]

You know what? It's the one thing that I think both supporters and people who like Trump and don't like Trump will agree is that he's a change agent. The only difference is the guys who support him believe that the change is what's needed to shake up a system that's become very, very rigid, that needs fixing. The people who don't like him say the change is chaos for the sake of chaos. And I'm one of those people who's capable. I see shades of gray and everything. I think that D.C. is broken.

[Professor Damodaran]

I think everybody agrees that the way our government raises money and spends money is just the system is broken. Does that mean I think tariffs and musk, like the Doji cost cutting is the way to go? I don't think so, because I think that you're breaking everything and hoping that you're not breaking things that shouldn't be broken. I think the problem with something like tariffs is you're breaking the rules of what drove a global economy for a while. We know what happened last century when tariff wars went to graze, but you're doing it expecting only positive consequences. And what if something you break is something you shouldn't have broken in the first place? So I worry about the fact that you're pulling all these things, you're breaking everything at the same time. Said, trust us, we know we can fix it.

[Aswath Damodaran]

What if we cannot? Right.

[Professor Damodaran]

So I think that this is something that's going to play out for the next Four years, you're going to see things broken. Sometimes those things that are broken should not have been broken in the first place. It's going to be tough to fix them. Net though, I think that I can't see how tariffs play out as better for the global economy. There is no story you can tell.

[Aswath Damodaran]

Where tariffs collectively make us globally better off.

[Professor Damodaran]

But here's a caveat. Could a tariff war end up with.

[Aswath Damodaran]

The global economy hurting, but the US Potentially gaining? Yeah, it could happen.

[Professor Damodaran]

Because this is one of the few.

[Aswath Damodaran]

Advantages you get when you're as consumption driven as we are as an economy, is it might end up that the end game is that. And in many ways, Trump seems to think of that as the end game, which is if the US Gains, what if the rest of the world goes into. And the Canada example is a perfect one. Right. That's a game where us actually has.

[Professor Damodaran]

A pretty strong hand.

[Aswath Damodaran]

It's more likely to win.

[Professor Damodaran]

But I think it's almost like you're.

[Aswath Damodaran]

Not thinking through what does it mean when your neighbor to the north is now no longer an ally. It's almost you're not thinking through the long term consequences, but long term and has almost nothing to do with this. It's short term, it's what can I pull in the US Best interest in the short term. And I have a worry that clearly some of this stuff will be paying the price in the long term.

[Ed]

You mentioned there's just this fear of things breaking that you break the kinds of things that you didn't want to break in an attempt to shake up or break the things that you wanted.

[Aswath Damodaran]

To break or you wanted to break because you thought you could replace it, but you find that you can't replace it. That's my worry, is they're breaking things saying, I can replace it. What if you cannot? I mean, you break the Medicare computer. I agree with you. It's a horrifically outdated system. My wife's mother was on Medicare and she'd be on the phone for two hours where they couldn't find things. It was incredibly outdated. No, I agree it needs change. But if you break the system and you're not able to replace it, and remember you have to replace it instantaneously, what happens if you can't mail the checks out or cover Medicare costs? I mean, that is a horrific side cost to this is even if it's only weeks, you've created weeks where people in their 70s and 80s might not be able to get the medical attention they need because you broke the system. So I think that you break systems, you got to recognize that if you can't replace them right away, there were going to be costs and consequences. And those costs and consequences can be catastrophic for some of the people involved in that space.

[Scott Galloway]

You mentioned previously that you could predict if someone believes Tesla is under overvalued based on whether they like Elon Musk or not. Which I think is really. That's interesting. Somebody told me that. Or the head of JP Morgan Asset Management, a friend of mine name Andy Cohen said that if you add up equity values and debt that the US now represents 70% of the capital markets globally. So to me that says, all right, you can either own the US for $70 or you can own the rest of the world for $30. And that strikes me as the US is overvalued and the rest of the world is undervalued. And if you apply the same logic, do you like America as a means of deciding whether it's under overvalued and potentially whether you invest in the US or start to invest again in other countries, that the flows might reverse.

[Professor Damodaran]

I think though, I think we're assuming that U.S. companies are the U.S. right? I mean in a sense they're buying the U.S. and I think that's what's changed. That makes a story because I've heard variants of the story every year for the last 15 years. And if you carry the two, it basically means you should be shifting your money out of US equity index funds if you're an index investor into European and emerging market funds. And for the last 15 years, every single year you look back and say I wish I hadn't done that. So I've been looking at this because clearly either the market is just really delayed in reacting or there's some. And I think the part of the story that the 70% and I think adding bonds to equities is I think.

[Aswath Damodaran]

A little skew the numbers because the US is the most bond friendly debt market in the world.

[Professor Damodaran]

The rest of the world, it takes bank debts. If I were to add bonds to.

[Aswath Damodaran]

Stocks, then I should be adding bank debt to equity and other markets to get.

[Professor Damodaran]

So I'll stay with the 50% which is still an impressive number of just market cap. And you look at the biggest market.

[Aswath Damodaran]

Cap companies in that segment, it's of course the Mag7, the big tech companies and you look at where they get their revenues and you start to very quickly come to the recognition that these are not US companies, these are multinationals through the accident of history that happen to be US based, they get huge segments of their revenues outside. So when you buy the s and P 500, you're no longer buying the 500 largest market cap stocks in the U.S. you're buying 500 largest market cap multinationals that you are getting global companies. So the 50% US share is really a much smaller share. If you look at what segment of US market cap is US revenue based.

[Professor Damodaran]

Is it still too high? Maybe.

[Aswath Damodaran]

But you're not getting the compelling number you get by just looking at market cap. And I think there's a reason for that. I mean, every market that I go to, I do a corporate. I take the companies in the index. And as you know, one of my pet fads is this corporate life cycle fad. And I put the companies in the index in the corporate life cycle. I did this in Brazil. And you take the Bovespa and you take every company in the life cycle. They're all mature to declining companies. There isn't a single new bank, might be the only one that's younger, slight growth, but they're all mature, declining. You go to even countries like China and India which have growth. If you look at the biggest companies, they all tend to be old time mature business. You go to Europe and forget about it. The indices are basically zombie companies that are well past their due date.

[Professor Damodaran]

But you look at the US market and look at the top 30, the top 50 stocks. You have stocks that are 12 years old and they're in there for better or worse. What's driving US market cap is the fact that the energy for growth is still coming from those young companies. And the US seems to be the only market where these young companies actually become large companies scale up. In most of the other markets they're consumed by the status quo. The existing companies buy them up. In a strange way, you're seeing the market rewarding the US for still creating at least a pathway for a young company with potential not only scaling up, but scaling up so much that it becomes one of the large companies in the game. Now, I know that's an indirect answer to your question, but I think in a sense the number scares me less than other issues. Like I think the fact that interest rates could go up, I think worries me more than the concentration effect that you see with US equities.

[Scott Galloway]

Just last question. A theme here is fallen angels. I love looking at stuff that's been cut way down. And I look at Novo Nordisk cut in half Moderna, which I think is a great company, it's up 90% since it's high. Intel, Starbucks, even with its rebound, you called, I take credit for it, but you called Meta's value back when it was 90 or 95 bucks. Correctly. You just said, regardless of what you think of the company, it's a cash volcano and it's been overly punished. Any companies you would describe right now as having been over punished.

[Aswath Damodaran]

Let's take the companies we talked about, right?

[Professor Damodaran]

Novo Nordisk, even if you cut the price by half, if you compare the market cap to where it was pre.

[Aswath Damodaran]

Ozempic, pre wegovy, it's way up there.

[Professor Damodaran]

I think what people are reassessing about.

[Aswath Damodaran]

Novo Nordisk is, let's face it, they got valuable because they were in the.

[Professor Damodaran]

Right, they got lucky.

[Aswath Damodaran]

I mean, it's not like amazing R and D where they said we're going to come up with a weight loss drug. Their diabetes drug happened to have a side benefit. And the question is, is this luck or is this going to change the market? And I think that until they come up with another product that is a market changer, blockbuster drug, I think the hypothesis has to be that they got lucky with these two drugs and they're going to go back to being a sleepy Danish diabetes drug company. And that market cap is actually far lower than the half that you estimate. So there I'm gonna hold off to see what their R and D can turn out because this is a very tough business to create blockbuster drugs and make money on them. And that jury is still out.

[Professor Damodaran]

Intel and Starbucks, though. I bought intel after I did my assessment. If, you know, last September when we talked, I talked about intel and Starbucks. I think Intel, I think there's a pathway back to not growth, but the market is pricing it as a dying company and I think that may be a little over the top. I think they have enough strength still that they can go back to being at least a mature chip company. And Deep Seq, in a strange way might give them new life because it says, look, everybody's not going to go after Nvidia chips if you can make these kinds of chips. So Intel, I think with the right management in place, and that'll take a few iterations because as you know, the CEO is kind of moved out to somebody. They're looking for somebody who can come in without. I don't want somebody who's incredibly ambitious who says, I want to make intel the next Nvidia or the next tsmc. Just be the old intel, right? Just go back to making what you did, you're going to be okay. Starbucks, and I speak as a Starbucks user, I'm not sure how you fix the company. Right. I mean, I, you know, I noticed that they're already starting to charge different prices for Starbucks across San Diego depending on which location it didn't used to be. The airport locations are always expensive, but with maybe because rent now lease rates are higher, they have this problem. They have these incredibly expensive leaseholds they've taken for Starbucks and there's nobody in them most of the time. They're all lined up outside the pickup window. They picked up their online. I'm not sure how you walk back.

[Aswath Damodaran]

To a business model that's sustainable.

[Professor Damodaran]

I'm sure they'll try, but there's so much legacy cost that they're going to have to cut through that.

[Aswath Damodaran]

I don't feel as optimistic about their way back to a healthy steady state.

[Professor Damodaran]

As I do with Intel. So I'm going to take each of.

[Aswath Damodaran]

These because each of the companies, I think, has a different issue. The question I'm asking is can new management fix the issue? If it can, then I'm more inclined to invest in it. If it's something systematic, something that's going to be more difficult to fix with the new management team, then I'm going to hold off because I think there's. You could be in a value trap. But these companies keep looking cheap and get cheaper over time rather than more expensive.

[Ed]

Aswath Damodaran is the Kirchner family Chair in Finance Education and Professor of Finance at NYU Stern School of Business where he teaches corporate finance and valuation. You can also read his research on his blog Musings on Markets, which by the way is probably my favorite financial blog out there. I really could not recommend it highly enough just in terms of signal versus Noise. I think it's just one of the most the highest signal financial blogs.

[Aswath Damodaran]

And Ed, I want to add that I leave typos and miss bad links in there just to make sure people realize it's not written by a bot.

[Professor Damodaran]

Bot would never screw up like that.

[Aswath Damodaran]

So think of those as intentional typos and intentional links that don't work.

[Ed]

Absolutely. Professor Demoderin, thank you so much for joining us. It's always a pleasure.

[Scott Galloway]

Thanks Azwarth.

[Professor Damodaran]

Thank you.

[Ed]

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsell is our research associate, Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof. G Markets from the Vox Media podcast network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

[Scott Galloway]

You had me in kind. Reunion as the World turn.

[Ed]

One quick note before we sign off, we're expanding Prof. G Markets with a new weekly newsletter that breaks down key market moves with data driven analysis and crisp visuals. Subscribe now at www.profgmarkets.com/subscribe.

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