Over the past few days, there’s been a huge amount of chatter about what DeepSeek means for the AI sector. More specifically, some are concerned about the implications for Nvidia (NASDAQ:NVDA) stock. Yesterday, (27 January) the share price fell by almost 17%, wiping off close to $600bn in market-cap. Here’s my take and what I’m doing about it.
Breaking down the news
Let’s first address DeepSeek. It’s a Chinese AI company that develops open-source large language models (LLM). It’s comparable to ChatGPT, where you can ask DeepSeek questions and get answers.
The main difference is that ChatGPT cost billions in order to produce, causing the industry to set a high benchmark in terms of the costs to develop AI models further. However, DeepSeek reportedly only cost a fractional $6m to train. This is the main reason why some investors are spooked. If a company can develop a model for such a low cost and with relatively few components, the sector might be heading for a large reset.
Now, let‘s turn to Nvidia. The share price drop yesterday was because DeepSeek used fewer advanced Nvidia chips. This is partly due to the ban on the export of advanced chips to China from the US. Clearly, the ban isn’t watertight, but that’s a different conversation!
The fact that a model could be trained using fewer Nvidia chips than normal could indicate that the revenue projections for Nvidia are overestimated. The whole premise of Nvidia dominance in this area has been thrown out of the window.
Negative views misplaced
I think the market’s reaction yesterday was overdone. To start with, this isn’t a story about Nvidia but rather about more LLMs coming online. I believe we’re entering a phase where more and more AI models will start to pop up. But I don’t see this as a huge threat to Nvidia. After all, the business provides the hardware to support and train these models.
Sure, some might need fewer chips than previously thought. But if more and more are being developed, more chips will be demanded. Selling fewer chips at a higher price or more chips at a lower price should ultimately mean revenue isn’t impacted by much.
If anything, I see the DeepSeek story as a positive for the AI sector in general. It pushes the boundaries and shows what’s possible. Of course, there will be winners and losers in this process. However, the constant progress and greater adoption worldwide are long-term positives for Nvidia’s share price.
Waiting for the dust to settle
The main risk, in my view, is that in the coming weeks investors might keep panicing and sell Nvidia stock. This could cause a sharper fall. Yet, if this happens I’ll use it as an opportunity to buy. I’ve been waiting for over a year for a correction in the share price and it looks like it’s finally happening.
Finally, let’s put things into perspective. Even with the drop, the stock’s still up 94% over the last year. Although I think some will be worried, from a long-term investment perspective, I don’t believe this is game over for Nvidia.
The post Here’s what the rise of DeepSeek could mean for Nvidia stock appeared first on The Motley Fool UK.
Should you buy Nvidia now?
Don’t make any big decisions yet.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.
And he believes they could bring spectacular returns over the next decade.
Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…
When such enormous changes hit a big industry, informed investors can potentially get rich.
So, with his new report, Mark’s aiming to put more investors in this enviable position.
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Is this my chance to buy Nvidia shares?
Here’s why FTSE investment trusts holding Nvidia and AI stocks got smashed today
Is DeepSeek about to cause a stock market crash?
£5,000 invested in Nvidia stock 1 year ago is now worth…
1 stock market strategy to target the next millionaire-maker like Nvidia
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
