The "Magnificent Seven" group of stocks dominated 2024, leading the tech sector to another banner year. As you can see from the chart below, virtually every Magnificent Seven stock beat the S&P 500 last year.
Microsoft was the only stock in the bunch to underperform the S&P 500 last year, and a basket of Magnificent Seven stocks would have returned about 60% last year, largely thanks to Nvidia's (NVDA +1.90%) outperformance.
I think Nvidia is a good bet to be the top performer in the Magnificent Seven again this year even after the launch of Chinese artificial intelligence (AI) chatbot DeepSeek R1 rocked the AI and tech sectors, sending Nvidia stock down 17% in one session on Monday. Let's take a look at that issue before tackling the overall case for Nvidia to outperform this year.
Image source: Getty Images.
Why the DeepSeek threat to Nvidia looks overblown
DeepSeek has made a chatbot DeepSeek R1 that offers comparable results to ChatGPT or Alphabet's Gemini, but uses much less power, and doesn't have the advanced chips, many of which are from Nvidia, that American start-ups like OpenAI rely on.
Silicon Valley venture capitalist Marc Andreessen called it "AI's Sputnik moment" in a social media post, a reference to the Russian space shuttle that was the first in the world to be launched, kicking off the space race between the two superpowers.
Nvidia even tipped its cap to DeepSeek, calling it "an excellent AI advancement."
Wiping out a sixth of Nvidia's value seems to be mostly a knee-jerk reaction from the market as it's unclear what the implications are from DeepSeek, especially at a time of rising tensions between the U.S. and China in an emerging tech cold war.
However, even if you accept that DeepSeek is a clear advancement for AI, that doesn't necessarily make Nvidia a loser. Lowering the cost of entry into generative AI functions like training and inference would democratize the industry, allowing more entrants. Prices for Nvidia components might fall, but there would likely be more buyers. Additionally, the company has proven its ability to evolve in the past, going from serving the video game industry to crypto to AI, and the applications and demand for its chips are likely to continue expanding, especially as industries like autonomous vehicles ramp up.
NASDAQ: NVDA
Key Data Points
Why Nvidia can still be the top "Magnificent Seven" stock this year
It will take time for the DeepSeek disruption to play out, but at this point, customers in the middle of building systems based on Nvidia GPUs like Tesla, Meta Platforms, OpenAI, and Oracle are unlikely to suddenly change course. It's also worth noting that DeepSeek is using Nvidia chips. It's just using an older version of them that it obtained before restrictions on advanced chip exports went into place.
That seems to show that Nvidia chips can be more powerful than previously known, which could be a boon to the company. In the meantime, its momentum remains strong as revenue jumped 94% in the third quarter, and management has said several times that demand continues to outpace supply.
Additionally, Nvidia looks like a good bet to keep gaining because the valuation still looks attractive. Estimates could change based on the DeepSeek threat, but the stock currently trades at a forward price-to-earnings ratio of just 27, which essentially matches the S&P 500. For a company that is still leading the AI revolution and growing rapidly, that looks like a bargain, in spite of any risk facing the stock.
Finally, whether or not DeepSeek upsets the AI market, the race to artificial general intelligence (AGI) will continue, and the stakes remain just as high as they were before the DeepSeek launch. As the leader in AI chips, it's a good bet that Nvidia will continue to play a role in that race and the next frontier of technology. That should fuel the stock higher this year despite the DeepSeek scare.
