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Stepan Lavrouk
Stepan Lavrouk
Articles (605) 

Aswath Damodaran: Are Markets Overvalued Right Now?

Momentum can carry expensive stocks like Tesla and Apple much higher

With the S&P 500 and Nasdaq indexes hitting all-time highs, even the most bullish investors may be beginning to worry about the valuation of some of the more headline-grabbing stocks. In a recent interview with CNBC, NYU Stern School of Business professor Aswath Damodaran discussed the new highs made in stocks like Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA).

Momentum can trump fundamentals in the short term

Damodaran is one of the most well-known academics in the field of valuation, so it's perhaps unsurprising that he was asked to speak on this topic. Unsurprisingly, he doesn't think that a stock split - like those carried out by Apple and Tesla - add value. After all, the market capitalization of a business shouldn't change just because the number of shares outstanding increases - but this hasn't stopped retail investors from piling into these stocks. However, Damodaran didn't suggest that investors should short overvalued stocks, as there is no knowing how high a bubble can go:

"We talk about earnings and cash flows and fundamentals, but in markets, momentum can drive things far more strongly than any other factor. And right now, the force of buying is behind both Apple and Tesla, and that's why if you sell short these stocks you're asking for trouble, at least in the near term."

Damodaran was also questioned on whether he felt that potential future catalysts for Tesla and Apple might justify the current excitement. He advised investors to exercise caution when looking ahead:

"Remember, catalysts can cut both ways - they're never uniformly good. When the new iPhone comes out, things are measured against expectations, and right now the expectations are sky high for both companies. With Tesla, this has been a long-standing issue - for ages the company has found a way to confound expectations. So there are catalysts coming up, and they can reverse the momentum, but as I said, I wouldn't bet against momentum right now."

He did go on to add that he believes traditional valuation metrics may underestimate the intrinsic values of technology companies, and that the widespread usage of services provided by companies like Apple, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) may justify their hefty price tags.

Moreover, the biggest tech players in the market actually benefit from turbulence and uncertainty when they affect their competition relatively more. For instance, Airbnb benefits from hotel operators like Hilton (NYSE:HLT) suffering comparatively bigger losses. Now, this doesn't mean that these tech companies aren't overvalued, but it does underscore an important point - it's hard to predict the future, and betting on mean reversion doesn't always work out.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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