Chinese startup DeepSeek recently reported that it had launched a top-notch AI model for a very low price of about $5.6 million,. Conversely, U.S. firms have reportedly shelled out “hundreds of millions or even billions of dollars” in order to launch such models. Given this situation, there are certainly reasons to be cautious on Nvidia stock at this point. Also importantly, DeepSeek reportedly used old A100 chips from Nvidia (NVDA) to develop its model.
On the other hand, the recent, sharp decline of the chip maker’s shares may turn out to have created a great buying opportunity. But only when we’ve obtained more information about DeepSeek’s project and large tech firms’ reaction to it can we begin to determine whether purchasing Nvidia stock makes sense.
As a result of the latter situation, I tend to urge investors who already own the name to hold onto their shares, but I personally would not advise anyone to buy shares of the stock now.
Reasons To Be Cautious on Nvidia Stock
Large U.S. tech firms, such as Meta (META) and Alphabet (GOOG, have been spending tens of billions of dollars on Nvidia’ latest AI chips. For example, Meta as of March 2024 intended to buy 350,000 of Nvidia’s advanced H100 chips, which reportedly set the company back $20,000 to $40,000 each.
Following DeepSeek’s report, these large tech companies could very well significantly scale back their purchases of NVDA’s offerings while they investigate the authenticity of DeepSeek’s report and try to determine whether they can use similar, inexpensive methods of creating AI models. Indeed, if these firms fail to take that step, they could be accused of wasting money, unnecessarily, lowering their bottom lines, and harming their shareholders.
Another factor to consider is that investors tend to be very averse to buying the stocks of firms that are facing uncertainty. With the future demand for Nvidia’s most advanced AI chips unknown, it’s doubtful whether Nvidia stock will advance much in the coming weeks, and it could very well lose significant ground during that period.
Finally, since Nvidia’s market capitalization is a gargantuan $3.16 trillion, the current level of the shares can only be justified if the company sells huge amounts of its most advanced chips going forward.
Reasons To Be Optimistic About Nvidia Stock
In a note to investors on January 26, JPMorgan indicated that DeepSeek may have spent significantly more money on AI training than it disclosed. Further, the Chinese start-up could have utilized open-source AI models in order to facilitate the development of its own system. Consequently, DeepSeek’s assertion that it only spent about $5.6 million on its model and exclusively used old Nvidia chips to create it may not be entirely accurate.
If American companies are unable to replicate DeepSeek’s techniques, they would have to pay the Chinese firm to create their AI models. For a number of reasons, including national security issues, U.S. government rules, PR concerns, worries about intellectual property loss, and concerns about the quality of DeepSeek’s work and its dependability, most large American tech companies would probably be very reluctant to take such a step.
And as many other commentators have pointed out, if AI does become much cheaper to create, the demand for the technology will likely skyrocket, enabling Nvidia to sell many more chips, even if their price tag drops tremendously. Over the longer term ,such a development could potentially boost the firm’s top and bottom lines a great deal.
Finally, if Nvidia does manage to meet analysts’ average estimates going forward, the stock is actually not expensive., as its forward price-to-earnings ratio is just 27.7 times. That’s a rather low P./E ratio for a company whose earnings per share is expected, based on analysts’ average estimate, to jump to $2.95 this year from $1.30 last year.
The Bottom Line on Nvidia Stock
Investors should be in “wait-and-see” mode on Nvidia stock at this point. After we learn more information about the authenticity of DeepSeek’s statements and American companies’ reactions to them, investors will be much better equipped to decide whether to buy Nvidia’s shares.
