What Happened?
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) fell 13% in the morning session as stocks heavily tied to the AI market took a hit after Chinese artificial intelligence startup DeepSeek released a new large language model (DeepSeek-R1) that ranks competitively on key global benchmarks (coding competitions, math evaluations), uses less advanced semiconductor chips, costs significantly less to build (at $5.5 million - excluding non-compute costs), and has already achieved strong adoption after topping the iPhone App Store for AI apps.
Notably, the company has also open-sourced this model, a move that may make it harder for rivals to justify huge upfront expenditures on hardware, software, and expertise to develop similar systems.
Speaking at the World Economic Forum in Davos, Switzerland, Microsoft CEO Satya Nadella praised DeepSeek's efforts, calling the new model "super impressive" for its open-source design, efficient inference-time computing, and high compute efficiency. "We should take the developments out of China very, very seriously," he added.
Nadella's comments suggest that upstarts like DeepSeek could reshape the competitive landscape of AI. DeepSeek's announcement disrupts long-held assumptions in key ways: 1.) It undercuts the narrative that bigger budgets and access to top-tier chips are the only ways forward for AI development. 2.) By using less advanced hardware, DeepSeek opens the door for innovators who face high chip costs or export restrictions, reaffirming they can still compete. 3.) The model's success questions the growth narrative of chipmakers like Nvidia—whose soaring valuations depend on the demand for cutting-edge, high-performance hardware.
Overall, DeepSeek's model demonstrates that AI innovation is no longer a race fueled solely by how much you spend, but rather by how resourceful you can be with what you have.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Nvidia? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Nvidia’s shares are very volatile and have had 24 moves greater than 5% over the last year. But moves this big are rare even for Nvidia and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 11 months ago when the stock gained 15.5% on the news that the company reported fourth-quarter results with a meaningful revenue beat, strong gross margin improvement, and EPS outperformance vs. Wall Street's estimates. Notably, revenue grew 265% year-on-year and 22% sequentially. The strong top line performance was mostly driven by the data center segment, which was up 409% year-over-year and 27% sequentially as demand for Nvidia processors optimized for generative AI, LLMs (large language models), and other AI workloads continued to accelerate. Notably, the company estimated that roughly 40% of Data Center revenue was driven by AI-related applications. Guidance for the next quarter was also good, with revenue, gross margin, and implied operating profit coming in ahead of expectations. The company noted that growth in the data center and professional visualization segments is expected to more than offset the anticipated seasonal decline in gaming. Zooming out, we think this was a great quarter that shareholders will appreciate.
Nvidia is down 8.2% since the beginning of the year, and at $126.98 per share, it is trading 15% below its 52-week high of $149.43 from January 2025. Investors who bought $1,000 worth of Nvidia’s shares 5 years ago would now be looking at an investment worth $21,145.
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