Will DeepSeek's AI Model Impact Nvidia's Valuation?

Did DeepSeek's artificial intelligence (AI) model really cost less than $6 million to develop? If this is true, it raises questions about why major tech companies are planning to spend tens of billions of dollars this year. Furthermore, there's also the massive $500 billion Stargate project recently announced by President Trump, adding more context to this discussion.

However, there are indications that DeepSeek's estimated costs might be significantly lower than reality. Recent reports suggest that the company may have spent over $500 million just on hardware. It may take time for investors to fully understand whether DeepSeek's AI model is genuinely a threat to the tech industry or not.

In the meantime, chipmaking giant Nvidia has seen its stock decline following these developments. Nvidia is often associated with AI, as its chips are essential for companies creating advanced AI models. The news about DeepSeek has already caused considerable losses in Nvidia's market cap, and the question now is whether there could be more declines ahead.

DeepSeek's Impact on Nvidia

The idea that a new Chinese start-up could outshine established tech giants like Nvidia, Microsoft, and Apple seems quite unlikely. The best talent in the tech industry works for these leading companies, and it's hard to believe a new player launched in 2023 could compete at such a level.

Moreover, the development costs of DeepSeek's AI model are likely understated. Investors do not have access to audited financial reports that can clarify actual expenses. Additionally, OpenAI, the creator of ChatGPT, has raised concerns that DeepSeek may have used OpenAI's AI models improperly. This raises questions about how DeepSeek managed to minimize its costs, perhaps leveraging existing technologies to achieve similar outcomes.

At this point, it's premature to conclude that DeepSeek represents a more efficient model than those of major tech companies, suggesting that these companies are misallocating billions of dollars.

The Future of Nvidia's Stock

Even if DeepSeek's model proves to be overly optimistic and its costs are indeed higher than stated, this might not lead to a swift recovery in Nvidia's stock price. What the news surrounding DeepSeek has highlighted is the emphasis on AI-related spending. A critical question has emerged: are large companies being overly ambitious with their AI investments?

This situation could prompt firms to reconsider their technology needs, potentially reducing AI-related spending due to economic uncertainties, such as impending tariffs. For a company like Nvidia, which has enjoyed substantial growth, any slowdown in demand for its products could make its stock more susceptible to significant corrections.

As of the beginning of the year, Nvidia's stock had already dropped by 12%. Analyst forecasts now place its trading at 28 times future earnings, which is reasonably priced for a company of its stature. Nonetheless, should those earnings expectations decline, Nvidia's stock valuation might not seem as appealing.

For long-term investors, now might be a good opportunity to consider increasing their stake in Nvidia. The company’s robust profit margins and strong market positioning, combined with its reduced value, suggest a positive outlook in the long term.

Author has no position in any of the mentioned stocks. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends long-term options on Microsoft.

AI, Nvidia, DeepSeek