A relatively small Chinese artificial intelligence (AI) start-up created a large language model (LLM) generative-AI chatbot to rival OpenAI's ChatGPT. But this isn't the major story. The major story is the bomb the company dropped in January: that it reportedly trained its model using just $6 million and a couple thousand Nvidia (NVDA 1.56%) graphics processing units (GPUs). Meanwhile, U.S. tech companies spend billions and order hundreds of thousands of GPUs for similar work. For example, the Colossus supercomputer, a product of Elon Musk's company xAI, is said to contain 100,000 GPUs, with plans to increase that number to 1 million. The DeepSeek news hit Wall Street hard. What if the tech giants no longer have to spend billions on servers and GPUs?
NASDAQ: NVDA
Key Data Points
Is Nvidia in serious trouble?
Despite initial concerns, the answer is probably a resounding no. Both Amazon (AMZN 0.87%) and Alphabet (GOOGL 0.42%) reaffirmed gigantic capital expenditure (capex) budgets in their latest earnings calls. Much of this spending will go toward data center infrastructure like Nvidia GPUs. Similarly, xAI is reportedly close to a deal with Dell (DELL +1.14%) worth $5 billion for data center infrastructure like servers and racks. This means xAI is moving ahead with Colossus, which means a huge investment in Nvidia products.
As shown below, Nvidia's fiscal 2025 is already a smashing success, even with only three quarters reported, and this will likely continue.
Image source: Nvidia.
I should also mention that many AI industry experts question DeepSeek's claims and believe it spent significantly more money and used thousands more GPUs than it claims.
One effect of the DeepSeek announcement has been a sell-off of Nvidia's stock. The forward price-to-earnings (P/E) ratio is 31 (as of this writing), well off its recent peak of 50 and near its troughs during pullbacks in early 2023 and 2024.
NVDA PE Ratio (Forward) data by YCharts
Both of these were great times to buy, and this could be as well.
Dell's data center sales on fire
Getting back to Dell and its potential blockbuster deal with xAI, the company operates two segments: the Infrastructure Services Group (ISG), which supplies products to data centers, and the Client Services Group (CSG), which sells laptops, computers, and accessories to businesses and consumers.
In the last quarter, Q3 fiscal 2025 (ended Nov. 1), ISG revenue rose 34% from the prior year to $11.4 billion, and the segment's operating income ballooned 41% to $1.5 billion. A deal with xAI will increase ISG revenue even more. Unfortunately, CSG sales dropped by 1% to $12.1 billion as the consumer market continued to lag. However, the segment still turned a modest operating profit of $700 million. Dell's immediate future will be determined by how much growth it can muster from data center infrastructure.
Investors in Dell get a rising dividend that is currently yielding 1.5%. The dividend was recently raised by 20%, and the company pledges a 10% annual increase through fiscal 2028. Like Nvidia, Dell stock dropped on the DeepSeek news and is trading well off its recent high.
The price is now more than 20% below the average analyst target of $150 per share.
Investors will be watching closely for any slowdown in data center construction or Nvidia sales. So far, there is no indication that either is happening, which means suppliers like Dell should also continue to see rising infrastructure revenue. The ultimate effect of DeepSeek may be a great buying opportunity for investors after Wall Street's apparent overreaction.
