Nvidia's Perspective on DeepSeek: Should Investors Consider Buying?

When one thinks of the leader in artificial intelligence (AI) chips, Nvidia (NVDA -2.84%) often comes to mind. Recently, however, the company faced a sudden sell-off when news broke about the Chinese firm DeepSeek and its achievements in the AI sector. This news saw approximately $600 billion wiped off Nvidia's market capitalization in a single day.

Despite this dramatic market reaction, Nvidia, along with market analysts and investors, has adopted a more positive outlook. They argue that DeepSeek's success in creating an AI chatbot likened to ChatGPT should not only be celebrated but could also create further opportunities within the AI industry as a whole. In light of these developments, many are asking whether investors should seize the moment and buy Nvidia stocks at a lower price.

Recognizing the Achievement

The initial excitement surrounding DeepSeek led to a significant sell-off of Nvidia stocks when the start-up claimed to have developed a chatbot similar to ChatGPT, but at an incredibly reduced cost.

DeepSeek revealed that it invested only $5.6 million to train its large language model, using less advanced graphics processing units (GPUs) compliant with U.S. export regulations. The U.S. government has restricted companies like Nvidia from supplying their most advanced chips to China due to potential security concerns regarding their use.

Nvidia's strong market position has been built on its state-of-the-art GPUs and its CUDA platform, providing the company with a noticeable competitive edge. Its impressive gross profit margins, ranging from 74% to 79% last year, reflect its significant control over the AI chip market and its ability to set prices. However, this competitive advantage could be jeopardized if a smaller company like DeepSeek, with fewer than 200 employees, can replicate cutting-edge AI technology for less than $10 million.

Many market experts are skeptical of DeepSeek's claims regarding the costs involved in its chatbot creation. Consequently, Nvidia's recent public statement about DeepSeek was noteworthy. A spokesperson from Nvidia classified the achievement as "an excellent AI advancement," showcasing how new models can be constructed using readily available resources while being fully compliant with export laws.

Nvidia also pointed out that DeepSeek demonstrates the relevance of its chips in China, a significant revenue source for them, and indicated that the demand for its chips in that market is expected to grow.

Most analysts dismissed the idea that DeepSeek’s progress could lead to Nvidia's decline. They view it rather as a broader opportunity within the expanding AI landscape. Daniel Newman, chief strategist at The Futurum Group, labeled the market's panic a severe overreaction, suggesting: "If we can use compute more efficiently, companies that we claim aren't generating enough revenue could build their models at a lower cost, thus driving more earnings per share."

Even though tech giants like Meta Platforms are making multi-billion dollar investments in AI infrastructure, they could also benefit from potential cost efficiencies, potentially inviting more competition into the space.

Is It Time to Buy Nvidia?

Is Nvidia's downfall the end of the road for the tech giant? The answer is likely no. Companies with extensive resources, like Nvidia, often find ways to not only weather competition but also to excel.

If DeepSeek succeeds in broadening the accessibility of AI software, this could lead to increased demand for Nvidia’s chips. Following the swift market decline on January 27 and a slight recovery on January 28, Nvidia's forward price-to-earnings (P/E) ratio was positioned just above its five-year historical average.

However, the concern regarding Nvidia, as well as its peers within the “Magnificent Seven” group, is their high trading multiples during a market uptrend that has continued for over two years. There is still much uncertainty regarding AI and how extensively it will be adopted.

The emergence of companies like DeepSeek serves as a reminder of the nascent stage of the AI industry. Similar patterns were seen during the dot-com bubble, where internet stocks experienced a drastic correction, though ultimately, the internet transformed multiple sectors.

If investors are considering holding Nvidia for a decade or two, purchasing shares now may be a sound decision. However, preparing for volatility in the short term is crucial.

Randi Zuckerberg, a former Director of Market Development at Facebook and sibling to Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Bram Berkowitz does not hold any positions in the stocks mentioned. The Motley Fool recommends and has positions in Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.

Nvidia, DeepSeek, AI