Should You Consider Buying Nvidia Stock After the DeepSeek Announcement?

Technology stocks faced significant turmoil recently after alarming claims from a Chinese start-up, DeepSeek, raised concerns about the future of artificial intelligence (AI) technology.

In the last few years, advancements in generative AI have created a thrilling bull market, presenting the promise of major productivity improvements. This potential surge in profits has led companies to hastily adopt these advanced algorithms.

Among the major beneficiaries of these trends is Nvidia (NVDA). Initially, the company was known for its graphic processing units (GPUs) designed for gaming, but these processors have also demonstrated remarkable capabilities in powering AI developments. This robust demand for Nvidia's products has resulted in a dramatic increase in its stock price, surging over 500% in just two years.

However, the recent assertions made by DeepSeek have caused Nvidia's stock to plummet by 17%, wiping out nearly $600 billion in market capitalization in one day. This drastic reaction led to questions about how Nvidia might be impacted by these new claims.

Taking a Step Back

Wall Street analysts are urging a cautious response to DeepSeek's bold claims. One notable skepticism comes from Bernstein analyst Stacy Rasgon, who questioned whether DeepSeek truly built an AI model comparable to OpenAI for just $5.6 million. He pointed out that this figure likely omits many essential development costs and resources.

While some investors feared that advancements in AI models might reduce Nvidia's business, evidence suggests otherwise. According to Jevons paradox, improvements in efficiency from new technology typically lead to increased demand. Lower-priced AI models could boost their adoption, resulting in heightened demand for Nvidia's cutting-edge processors.

C.J. Muse, an analyst at Cantor Fitzgerald, echoed this sentiment by emphasizing that innovation will lower adoption costs while simultaneously increasing the need for more computational power over time, which could benefit Nvidia.

In fact, Tigress Financial upgraded Nvidia to a strong buy and adjusted its price target to a robust $220. This implies a potential upside of 71% from the stock's recent closing price, driven by persistent growth in the data center market, where Nvidia holds a dominant position.

Overall, Wall Street remains overwhelmingly positive about Nvidia, with 94% of analysts offering buy recommendations and none suggesting a sell in recent analyses.

Insights from Analysts

A recent discussion among financial analysts highlighted several key points regarding DeepSeek's announcement:

• There is skepticism about the claim that training DeepSeek's chatbot only cost $5.6 million, with indications that this figure likely only reflects recent expenses.
• DeepSeek's AI assistant has become the most downloaded free app on the Apple Store, but there are doubts about the actual usage versus the number of downloads.
• This development might simply be part of a technological evolution, leading to a focus on innovation as resources become limited.
• Importantly, even breakthroughs from DeepSeek are unlikely to diminish the fundamental need for Nvidia's advanced processors in AI model training.
• The analysts collectively agreed that Nvidia's current high valuation might lead to increased volatility, which could challenge investors' resilience.

Overall, it appears that DeepSeek's claims represent more of a natural progression in technology rather than a seismic shift.

As the AI revolution continues to unfold, investors should brace themselves for more significant developments in the field. Some may have hastily departed from Nvidia stock following the news from DeepSeek, but reacting impulsively to such news could lead to regrettable investment decisions.

Nvidia is presently priced at approximately 50 times earnings. While this may deter some value investors, it remains relatively reasonable compared to the company's five-year average price-to-earnings ratio of 81. Moreover, Nvidia's stock soared more than 2,000% during that same period, highlighting its value.

Given Nvidia's consistent history of innovation and strong market presence, it continues to be seen as a potentially worthwhile investment.

Nvidia, AI, Investment