Prof G Markets - The Trouble With Tariffs + Why Palantir Could Dominate AI — ft. Aswath Damodaran

Episode Date: February 6, 2025

Scott and Ed open the show by discussing the potential tariffs on Mexico and Canada, Palantir’s earnings, and Vanguard’s largest fee cut ever. Then Aswath Damodaran, professor of finance at NYU’s Stern School of Business, returns to the show to analyze how DeepSeek’s rise reshapes the AI landscape. He shares why he hasn’t valued Palantir yet but still sees it as a potential AI leader and a prototype for the premium AI market. Aswath also weighs in on whether Tesla and Nvidia are overvalued, offers his views on tariffs, and explains why he thinks Intel has been overly punished. Subscribe to the Prof G Markets newsletter  Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

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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. Welcome to Prop G Markets. I don't have the cameras on of the producers. If the producers laugh, I feel like I have cloud cover. Uh-oh, Claire's not laughing. It's a wry smile. Does that count?

Okay, here we go. Welcome to PropG Markets. Today's episode is presented by Funrise, probably for the last time after they hear that joke. I doubt it. 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. 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? 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 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. I'm alone at Disney world. I just spoke to one of the millions of healthcare companies. Uh, it 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's like? That's the conference we're hosting where the one's paying for you to be here. 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, merely got here, so fucking jet lagged, I couldn't sleep, so I popped a Xanax, overslept, phone blowing up, so I ran down and greeted a group of 3,000 healthcare professionals. And still, still a little bit of a Zanny hangover, so ask me how the talk went, Ed. How did the talk go, Scott?

I don't know. I don't know. I don't know. Anyways, that's, that's my story. That's exciting stuff. All right. Well, let's get into some headlines here. Am I boring you? 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's stock soared 22% after the company reported fourth quarter revenue and full year guidance that exceeded expectations. The company also saw strong growth in US commercial and government sales, including a $400 million contract with the US Army. Over the past 12 months, the stock has quintupled in value. 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 going to happen and go into effect, but the tariff on China remains intact. I'll give you a minute. 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 want to expel Hussein from Kuwait, they put their young men

and women's lives in harm's way because they see us as we're brothers in arms. When we have fires, they send their bravest and most interesting aviation innovation, the scooper, no questions asked. They don't ask for compensation. They don't posture. I just had, I called the CO last night

of a company I'm on the board of, and I said, how's the coordinating? He was 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 worried about how the tariffs are gonna take impact.

So 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 in trashing it. And by the way, the market called us, the market wasn't scared. The market said, this is all posturing. It's going to get solved when he realizes this is just stupid.

This will hurt us. Kind of those, those, those, 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%. Dude, you're too young to remember what a drawdown is. No, come on. I'm just saying that the market reacted, they probably didn't take it as seriously to your point, but the market was still like,

okay, this is something to think about. 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.

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? 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, 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 $2,500 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 economy, 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.

This is literally the definition of stupid, hurting other people while you hurt yourself. 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, 1,300% in the past two years, trading at 75 times sales compared 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. 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, you know, 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 Bonfield 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 draped themselves in the flag. And I think there is a large market that is not represented by the 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 boomerish and get off my lawn right now.

You do, you do indeed, 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 on 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,

you know, have the rubber meets the road and maybe have a board in 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 gonna do it. And so Palantir zigged the other way. And I think the market zigged the other way. And I think the market has responded in spades.

And I got to think also they're in the right place at the right time. I got to think the Trump administration loves these guys. 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 all of 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 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. 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 in the haystack. And everything I've learned over 30 years of working with hedge funds, private equity people working with people I've sought the 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 it's, 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 longterm. And these guys, whatever they've 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 clipping one to 2 percent a year over 10 years. That's why they're all rich.

Yeah. They're not investing that well, they're just scooping up a fee. If you took the entire alternative investments universe and aggregate it at all, it's underperformed the market by their fees. So I love Vanguard. I think they've done, 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. Exactly. And I just want to give us, or this is 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, that's 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 wanna 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 DeModeran. If you're enjoying the show so far and you haven't subscribed, be sure to give Proficy

Markets a follow wherever you get your podcasts. Support for the show comes from the Fundrise Innovation Fund. The investing world seems to be bending towards democratisation, but venture capital always felt like it may be one of the last ivory towers to fall. It requires a lot of capital, the right relationships, etc, etc. That's probably why when the Fundrise Innovation Fund launched promising to democratize venture capital, there was a lot of skepticism. But the progress they've made in a few years is hard to argue with. The Innovation Fund has now built a $150 million portfolio of some of the most highly sought after

private tech companies in the world, and their minimum investment is just 10 bucks, which is virtually unheard of for venture capital. Look, even the best venture funds should be categorized as high risk investments. Venture investing is not for everyone. See above, high risk. But at a minimum, you can visit fundrise.com slash ProfG to check out the Innovation Funds portfolio for yourself. Visit fundrise.com slash ProfG to check out the Innovation Funds portfolio and start investing today. Welcome back. Here's our conversation with Professor Aswath Demodaran, 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 ProfGMarkets. Thank you for having me, Ed. So I would love to start with DeepSeq, which you recently wrote an article on. Just give us your headline reactions on what happened with DeepSeq and what you think it means for the rest of the AI market. You know, it's because I am a teacher first and an investor second. I'm always torn when something like DeepSeek happens because it kind of brings home something I've been trying to get through in class so much more effectively than words I could have used. In fact, the week before DeepSeek, weekend before DeepSeek showed up on our radar, I taught my first undergraduate valuation class.

And as Scott knows, I mean, I teach in Paulson Auditorium, the 350, 21-year-olds, 20, 21-year-olds in there. And they're, you know, they're eager to learn about valuation. So I talked about what valuation is. They're coming and 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.

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 your time that will change your story. 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 DeepSeek happens and in many ways it's changed the AI story.

So to me the most interesting thing about DeepSeek is not the company or its Chinese origins or 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 use 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 or DeepSeek, but the AI Emperor has definitely sprung a wardrobe malfunction, as I described in my post after DeepSeek, 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. So take us through exactly what that AI story was before DeepSeek and what it is now after DeepSeek? The pre-DeepSeek AI story had three parts to it. The starting part first is that the market for AI products and services is going to be incredibly huge.

The reason that's kind of tricky is there's no product or service right now that's out there that actually makes money, but the assumption is going to be huge. Okay 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 starting point and people started throwing numbers around in the trillions of dollars that this AI product and service market would be three trillion four trillion five trillion that's the end of the story. The start of

the story is to enter the market, you needed two things. 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 middle part actually falls out of those two other parts, which is the entry costs are huge and the end market is going to be huge. And the middle part actually falls out of those 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 costs, 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 DeepSeek 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 DeepSeek showing up. 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 DeepSeek

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 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? That's why I think the story is not about DeepSeq 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 is 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 product. 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 accountant in history has ever accounted. 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 being told,

to build an accounting AI, you still need the Nvidia chips and lots of data. And what DeepSeq did was open the door to all of those people who are skeptical saying, you know what, at least for a segment of the AI product and service market, I'm gonna call them, I call them low grade in 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 don't require incredible computing power. DeepSeq 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 need 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, there's 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 AR 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 will come out about Deepsea 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 the word stolen because that will already require me to pass judgment. Distilled is the word they're using.

That they borrow data from the open- Inspired by. Yeah, inspired by. And that the Chinese government is an affair. 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 is told as 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 media, internet, PC, 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, you know,

every one of these buzzwords, there was this moment that, I call this the bar mitzvah moment, where you wake up and you say, hey, you know, where's the grownup part of this story? I think this was a good part for the AI story because it says, look, there is no AI company. Are you an AI architecture company or software? So if we're sensible,

we'll start asking questions about AI that I think are much healthier questions, hopefully, after DeepSeq than before. So Aswath, we both teach at the same institution. I have a series of go-tos where I think you know, I don't know if you have this, I have a series of go-tos where I think, okay, I got to build a classroom on this because it's actual something resembling insight. And one of those is what I think I still hold on to, 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 are just market cap of any US airline. 80% of Delta American United for, you United for 50 or 60% of the price. One, is this essentially the market going Walmart

and Tiffany and or two is DeepSeek the potentially the old Navy of AI and is gonna grow with value faster than the rest of them. I think actually the market is going to have three segments to it. One is the Tiffany, the Walmart and the the third is we've got these platform players, right? Microsoft, Meta, Google. And there is this possibility that for them, AI will be a freebie that they,

the product 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 on Microsoft, my guess is they're gonna 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 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've got to get people to pay a higher price for your product. So I think it'd be fun to take the retail analogy and play it out here. The reason I'm a little wary about DeepSeek

being the old Navy, because as Ed pointed out, there are all these things that make me suspicious of whether the DeepSeq story is being fully told. Now, I'll be quite honest. If I were DeepSeq, I'd have laid all my cards on the table. If it cost them a billion dollars, I'd have said it cost 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 fixable. But if they borrowed 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 OpenAI. I mean, there's an old saying, it's good to have the competition, the types of competition. Because in the case of DeepSeek, their best advantage is they're competing in 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 DeepSeek 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 DeepSeek,

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, you know, will AOL win this game or will Cisco win the game? Lycos, Alta Vista, 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's 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 eight tenths of speed of sound. It has changed the world. I didn't have to get on a steam ship 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 changed 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 DeepSeek 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.

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 super power computers, I think Palantir might be a winner in that space because I can't imagine a way that a competitor is gonna 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, this is between bankruptcy and making billions. It's not figured out a way to make money. I do think the premium AI market, and it'll be the data plus supercomputing that gives those companies 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 businesses in this space not into bankruptcy but into this period where they keep, you know, flirting with bankruptcy while consumers benefit. But consumer benefits come with side costs, which is we're all better off,

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 at cost pretty close to nothing. Will that make us happier? I mean, I'd say, 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 going to take our drudgery off. And that's why the last part of my post was about, hey, every time you get these new technologies, I'm told that this is going to make my life simpler, less drudgery and happier. And every time I look back and say, really? And I worry about that AI effect on all of us.

What exactly are we going to be looking back at 15 years from now? As you know, Scott and I both know Jonathan Hyde, he's pointed out that the end effect of smartphones might not be that you can get DoorDash delivered in 15 minutes. It might be that your teenager

has 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.

We'll be right back. Support for the show comes from the Fundrise Innovation Fund. Think of the five biggest names in AI today. How many of these companies do you own shares of? Probably not many. Maybe one, maybe two. Why is that? Because the open AIs and anthropics of the world are still private. That means unless you're an employee or a VC,

you're out of luck. So it isn't hard to see why venture capital has been one of the most prized asset classes in the world. But unless you're worth eight or nine figures, you likely don't have access to these funds. The Fundrise Innovation Fund is different. It's already raised more than 150 million. It holds a portfolio of pre-IPO tech companies that are valued at tens or even hundreds of billions of dollars. And most importantly, it's open to

investors of all sizes. Visit fundrise.com slash prop G to check out the Innovation Funds portfolio and start investing today. Relevant disclaimers can be found at the end of the show and at fundrise.com slash innovation. We're back with Profgy 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 wanna say 1500% 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. I'd 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, because 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 in the 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're very sticky customers. Right? 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 you built in that are almost unbreakable. So does it justify a 1500% price increase? I don't know, but I'm willing to listen to somebody

who says it is. But as an investor, I need to at least have the, at least a sense 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,

but as an investor, I can't buy you as a business because I really don't know what you 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 Ballantyr and then harvest that space to make as much money as they can. 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 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? 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 have 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, you know, Palantir is one of the few companies with a tangible product or service that you can point to and say, you know, they'll find a way to make money on it because it is unique and different. We need to get like the Department of Defense on the line, get a product review from them. To figure out what is going on.

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. 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 just too many known unknowns. My other one, this is a cross I'm going to die on here. Now do Tesla. Tesla has become as much of a political bet

as it is an electric car bet. And I think that worries me. I mean, I've invested in, before Tesla, I've invested in companies and other countries with connections with who's in power was a big factor. You know, 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 a company. I think Tesla kind of broke 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. 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, 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 next great electric car company in the 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. 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 political players, pushing into the story and have never been good with political companies. And we also got to 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 115, 116. I assume you still think it's overvalued? Well, my value went the other direction. It went from 87 down to 78 because of DeepSeek. 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, another 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 regret factor that led me to kind of hold half. It's that way either way I can point to something I've done and say I'm okay with it.

And that's my psychology. I need that to make sure 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 framework, maybe you have a different perspective on what DeepSeek did. And maybe your conclusion would be

that DeepSeek actually made Nvidia more valuable. I have a tough time figuring out what that story would be, but I think that it's 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. 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. 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, that people who don't like them say the change is chaos for the sake of chaos. And I'm one of those people who see shades of gray in everything, I think that DC is broken. 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 great, but you're doing it expecting only positive consequences. 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. I said, trust us, we know we can fix it. What if we cannot? 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 where tariffs collectively make us globally better off. But here's the caveat. Could a tariff war end up with the global economy hurting but the US potentially gaining? Yeah, it could happen because this is one of the few 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 the... 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 a pretty strong hand. It's more likely to win. So, but I think it's almost like you're 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 it's 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's clearly some of this stuff we're going to be paying the price in the long term. You mentioned there's just this fear of things breaking, you break the kinds of things that you didn't want to break

in an attempt to shake up or, you know, break the things that you wanted to break. Oh, 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 that breaking things and saying, I can replace it. What if you cannot?

I mean, you break the Medicare computers. 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, so 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. 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, but that's interesting. Somebody told me that, or the head of JP Morgan Asset Management, a friend of mine, Amanda 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 where the, you invest in the U S or start to invest again in other countries that the flows might reverse? 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 the story.

Because I've heard variants of the story every year for the last 15 years. And if you carry it too, 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 and reacting or there's some... And I think the part of the story that the 70%...

I think adding bonds to equities is, I think, a little skews of numbers because the US is the most bond-friendly debt market in the world. The rest of the world, it takes bank debts. If I were to add bonds to stocks, then I should be adding bank debt to equity and other markets to get. So I'll stay with the 50%, which is still an impressive number of just market cap. And you look at the biggest market cap companies in that segment, it's of course the Mag 7, the big tech companies, and you look at the biggest market cap companies in that segment, it's of course the Mag-7, 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 happened to be US based. They get huge segments of their revenues from outside. So when you buy the S&P 500, you're no longer buying the 500 largest market cap stocks in the US, 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. Is it still too high? Maybe, 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, in every market that I go to,

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 BVESPA and you take every company, you put 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 and 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. But you look at the US market, you 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 U.S. seems to be the only market where these young companies actually become large companies, scale up. In most of the other markets, they are 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. 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.

Just last question, a theme here is fallen angels. I love looking at stuff that's been cut way down. And I look at Nova Nordisk cut in half, Moderna, which I think is a great company, it's off 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? Let's take the companies we talked about, right? Nova Nordisk, even if you cut the price by half, if you compare the market cap to where it was pre-Ozempic,

pre-Vagovia, it's way up there. I think what people are reassessing about Nova Nordisk is let's face it, they got valuable because they were in the right, they got lucky. I mean it's not like amazing R&D where they said we're going to come up with a weight loss drug, the diabetes drug happened to have a side benefit. And the question is, is this luck or is this going to change them? And I think that until they come up with another product that is a market changer, a 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've estimated. So there I'm going to hold off to see what their R&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. Intel and Starbucks though, I bought Intel after I did my assessment 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 DeepSeek in a strange way might give them new life because it says, look, you know, 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 DSMC.

Just be the, 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 maybe because the 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 to a business model that's sustainable. I'm sure they'll try, but there's so much legacy cost that they're going to have to cut through that I don't feel as optimistic about their way back to a healthy, steady state as I do with Intel. So I'm going to take each of 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 gonna 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. Aswath Damodaran is the Kershna 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 out there. 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. A bot would never screw up like that.

So think of those as intentional typos and intentional links that don't work. Absolutely. Professor Demirto, thank you so much for joining us. It's always a pleasure. Thanks, Valsw much for joining us. It's always a pleasure. Thanks, Oswald. Thank you. 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. You held me in kind reunion As the world turns And the dark lies In love, love, love, love One quick note before we sign off, we're expanding Proffgy Markets with a new weekly

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