There's a compelling argument that recent developments in the field of artificial intelligence (AI) could have vast implications for the future. Over the past couple of years, advances in generative AI have helped fuel a roaring bull market with promises of significant productivity increases. The potential windfall of increased profits has companies racing to adopt these next-generation algorithms.
One of the biggest beneficiaries of these secular tailwinds has been Nvidia (NVDA 1.58%). The company's graphic processing units (GPUs), which were initially developed for gaming applications, proved equally adept at supplying the computational horsepower needed for AI. Robust sales of these processors fueled a parabolic rise, sending Nvidia stock up more than 500% over the past two years.
However, claims made by Chinese start-up DeepSeek threatened to upset the existing paradigm, sending Nvidia into a tailspin. The stock slumped 17% and lost nearly $600 billion in market cap in a single day. Nevertheless, after a good night's sleep, Wall Street has some thoughts on the matter.
Perspective is required
Edgar Allan Poe famously wrote, "Believe nothing you hear, and only one half that you see." Wall Street seems to be taking that approach, to a certain extent, regarding some of the assertions made by DeepSeek. Specifically, claims that it created its chatbot for $5.6 million are being met with skepticism by some analysts.
Bernstein analyst Stacy Rasgon wrote in a note to clients (emphasis mine), "Did DeepSeek really 'build OpenAI for $5M?' Of course not." The analyst suggested that many of the routine expenses and development costs were left out of the total. "DeepSeek's R1 paper did not quantify the additional resources that were required to develop the R1 model (presumably they were substantial as well)," he wrote.
Many investors panicked on Monday, fearing that more efficient AI models would mean less business for Nvidia, but that's likely not the case. According to Jevons paradox, efficiency gains from technological advancements generally increase demand by bringing costs down. Put another way, lower-cost AI models will drive increased adoption, which will increase demand for Nvidia's AI-centric processors.
Cantor Fitzgerald analyst C.J. Muse took a similar position: "Innovation is driving down cost of adoption and making AI ubiquitous," he wrote. "We see this progress as positive in the need for more and more compute over time (not less)." This bodes well for Nvidia.
Tigress Financial upgraded Nvidia to strong buy on Tuesday and increased its price target on the stock to a Street-high $220. That represents potential upside for investors of 71% compared to Tuesday's closing price. The analyst believes that the data center growth needed to support AI will continue unabated and Nvidia -- which controls a dominant share of the data center GPU market -- will continue to profit from this trend.
Even in the wake of the DeepSeek bombshell, Wall Street is almost universally behind Nvidia. Of the 63 analysts who have offered an opinion thus far in January, 94% rate it a buy or strong buy, and none recommend selling.
This shows that Wall Street remains remarkably bullish on Nvidia despite DeepSeek's seemingly earthshaking developments.
NASDAQ: NVDA
Key Data Points
The Motley Fool's Opinion
On Jan. 27, a roundtable discussion among Fool analysts took place, and they debated the issues surrounding DeepSeek's announcement. From that conversation, several highlights stand out:
- The panelists echoed the question of whether it cost just $5.6 million to train DeepSeek's chatbot. A review of the white paper supplied by DeepSeek seems to suggest that this only includes the cost for the most recent version and none of the development that preceded it.
- The DeepSeek AI assistant recently became the No.1 downloaded free app on the Apple Store. However, there seems to be a discrepancy between the number of downloads and the actual app usage, which could call into question the veracity of these statistics.
- Those caveats aside, there's the potential that this is the natural evolution of the technology. As resources become more scarce, the focus will inevitably turn toward innovation, breeding the next generation of advancements.
- Even if this represents a breakthrough in AI development, it likely won't reduce the need for Nvidia's state-of-the-art processors, as they will continue to play a crucial role in training AI models.
- The group generally agreed that Nvidia's premium valuation would lead to increased volatility, which would test the mettle of investors.
Collectively, the evidence suggests that DeepSeek's bombshell was more of an inevitable evolution of technology than a major breakthrough.
It's still the early days of the AI revolution, and as such, investors should expect more "bombshell" developments in the field in the months and years to come. Some investors were scared out of Nvidia on Monday, but having a knee-jerk reaction to news like this could be a costly mistake.
Data by YCharts
Finally, Nvidia stock is currently selling for roughly 50 times earnings. While that might be enough to send value investors headed for the exits, that's far below Nvidia's average price-to-earnings (P/E) ratio of 81 over the past five years, making it relatively inexpensive from a historical perspective. Furthermore, the stock gained more than 2,000% during that same period, which illustrates why it is worthy of a premium.
Given the company's long track record and history of innovation, I still believe Nvidia is a worthwhile investment.
