We are constantly reminded not to get too comfortable in the world of investing. When things seem to chug along on autopilot, an innovation shakes things up. A recent example is the late 2022 release of the original ChatGPT, which thrust artificial intelligence (AI) into the forefront and set off a race in an industry worth trillions of dollars. A breakthrough from a Chinese company called DeepSeek may be shaking things up again (or there may be more to the story).
There are several layers to this onion. Here's what to know.
What is DeepSeek?
DeepSeek is a Chinese tech company that created DeepSeek-R1 to compete with ChatGPT-4 and other large language models (LLMs), like Alphabet's (GOOG 0.84%) (GOOGL 0.92%) Google Gemini and Llama 3 created by Meta Platforms (META +0.23%). But that isn't the headline-inspiring story. DeepSeek "trained" its model with $6 million and just 2,000 somewhat outdated Nvidia (NVDA 1.29%) graphics processing units (GPUs). This is a startling claim when competing programs reportedly cost hundreds of millions of dollars and many thousands of top-shelf GPUs. For example, xAI's Colossus uses 200,000 GPUs, with plans to expand to 1 million.
The news crushed Nvidia's stock. It was down more than 20% from its recent all-time high at one point, as investors worried about what this breakthrough would do to GPU demand.
NASDAQ: NVDA
Key Data Points
But is this breakthrough exactly what it seems? Maybe not. Industry experts have said they believe the actual cost of DeepSeek-R1 is $1.6 billion and that the company has 50,000 Nvidia GPUs. DeepSeek may have exaggerated its triumph because of U.S. export controls on high-powered GPUs, preferring to avoid the ire of regulators, or perhaps to garner more attention. Either way, it doesn't look like the U.S. tech giants will stop buying thousands of Nvidia GPUs anytime soon.
Alphabet and Amazon (AMZN +0.15%) announced massive 2025 budgets for capital expenditures (CapEx) on their recent earnings calls. Amazon spent $26 billion in the fourth quarter and expects this to continue in 2025, while Alphabet dished out $14 billion with plans to spend $75 billion in 2025. Much of this will go toward data centers, servers, and GPUs.
Is Nvidia stock a buy now?
It was going to be difficult to top Nvidia's incredibly successful fiscal 2024, which featured $61 billion in sales on 126% growth. This was led by staggering growth in data center sales that hit $48 billion on 217% growth. However, fiscal 2025 is also incredible. Through three quarters, sales are $91 billion, led by another massive increase in the data center segment.
Source: Nvidia.
Even better, operating income through the third quarter of fiscal 2025 is $61 billion. The 67% operating margin, versus 61% in fiscal 2024, shows that demand is accelerating as customers are willing to pay steep prices to obtain Nvidia products.
Rather than a disaster, the drop in Nvidia stock caused by DeepSeek looks like a terrific opportunity for long-term investors. As shown below, the forward price-to-earnings (P/E) ratio dropped sharply along with the stock price.
NVDA PE Ratio (Forward) data by YCharts.
As you can see on the chart, the sudden drop in valuation isn't unique. However, it is rare, having happened only once in 2023 and 2024. Both times were excellent opportunities for investors to buy the stock. With DeepSeek's claims in question, Big Tech confirming that capital investments will be robust, and Nvidia's spectacular results and lower-than-usual valuation, long-term investors should consider purchasing the stock now.
