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Nvidia Calls China's Deepseek An "excellent Ai Advancement": Should Investors Press The Buy Button?
One might think that artificial intelligence (AI) chip king Nvidia (NASDAQ: NVDA) might not be so pleased with the Chinese company DeepSeek, considering that news of DeepSeek's achievement in the AI space led to an intense single-day sell-off that erased roughly $600 billion of Nvidia's market cap on Jan. 27.
However, Nvidia -- along with analysts and investors -- has taken a more constructive view, arguing that DeepSeek's ability to design an AI chatbot comparable to OpenAi's ChatGPT should be lauded, and that its may represent an opportunity for the entire AI market. With that in mind, should investors buy the dip on Nvidia?
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Praising the advancement
When DeepSeek surged into the public consciousness, the market initially responded by selling off Nvidia because the Chinese start-up claimed to have created a chatbot similar to ChatGPT at a fraction of the cost.
Th Chinese company says it spent only $5.6 million to train its large language model, and used less powerful graphics processing units (GPUs) that are compliant with U.S. export restrictions. The U.S. has banned companies like Nvidia from selling some of their most advanced chips to China due to concerns about how that country might use their capabilities.
Part of the investment thesis for Nvidia lately has been that it has an enormous competitive moat, thanks to its cutting-edge GPUs and its CUDA platform.
Its high gross profit margins -- in the 74% to 79% range last year -- support this premise, showing that it has near-complete control of the AI chip market and its own pricing power. But all this could be threatened if a company with fewer than 200 employees spent less than $10 million and used old Nvidia chips to replicate the current state of the art in AI software.
Many doubt that the cost of DeepSeek's chatbot was only $5.6 million, and have questioned what inputs actually went into its design. That's why it was interesting to see Nvidia's commentary about DeepSeek. An Nvidia spokesperson praised it as "an excellent AI advancement" that illustrates how new models can be created "leveraging widely available models and compute that is fully export control compliant."
The company also said that DeepSeek shows that Nvidia's chips are useful in China, a material revenue driver for the company, and that this market will need more of its chips to meet demand.
Analysts largely refuted the idea that DeepSeek's rise could mean the end of Nvidia. Most actually see it as an opportunity for the broader AI trend. Daniel Newman, chief strategist at global tech researcher The Futurum Group, called the sell-off an overreaction: "If we can use compute more efficiently ... the companies that we're saying aren't driving enough revenue will be able to build their models cheaper. They'll be able to create solutions with less overhead expense, and they're going to drive more [earnings per share]."
Although companies like Meta Platforms have pledged to spend tens of billions on AI infrastructure, they could also likely benefit if it turns out that some of this spending is not necessary, although that would open the door for competitors as well.
Should you hit the buy button?
Do I think Nvidia is done for? Absolutely not. Companies like Nvidia with tons of resources tend to find ways to not only survive but also get ahead of competitors.
If DeepSeek does make AI software more widespread, that could drive more uses and boost demand for Nvidia's chips. Following the big sell-off on Jan. 27 and a mild rebound on Jan. 28, the company's forward price-to-earnings ratio (P/E) stood slightly above its five-year average.
NVDA PE ratio (forward); data by YCharts.
My issue with Nvidia and its "Magnificent Seven" cohort is that they are still trading at high multiples in a bull market that has lasted for more than two years. There is still a lot we don't know about AI and how widespread it will actually become.
If anything, the arrival of DeepSeek demonstrates how early we still are in the AI game. Similar events also happened in the dot-com bubble. That was followed by a steep pullback among internet stocks that had run too high too quickly -- but eventually, the internet ultimately changed everything.
If you plan to hold the stock for 10 to 20 years, then you can definitely buy Nvidia now. However, I think it could be a bumpy ride in the near term.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
