The Impact of New AI Claims on Nvidia’s Stock and Future

Recent advancements in artificial intelligence (AI) could reshape the financial landscape. In the past few years, the rise of generative AI has spurred a strong bull market, with companies eager to harness productivity gains from these innovative technologies. As a result, businesses are quickly turning to these advanced algorithms to boost their profits.

Nvidia (NASDAQ: NVDA) has emerged as one of the primary beneficiaries of these trends. Originally designed for gaming, the company’s graphic processing units (GPUs) have proven remarkably effective for AI computations. This surge in demand has led to a dramatic increase in Nvidia’s stock, which has skyrocketed over 500% in just two years.

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However, a recent statement from Chinese start-up DeepSeek has raised concerns, causing Nvidia’s stock to plummet 17% in a single day and wiping nearly $600 billion from its market value. Despite this drastic decline, reactions on Wall Street reveal a more nuanced perspective.

Image source: Getty Images.

Wall Street’s Cautious Response

As Edgar Allan Poe wisely noted, “Believe nothing you hear, and only one half that you see.” This sentiment seems relevant as analysts on Wall Street react to DeepSeek’s claims, particularly its assertion that it created a chatbot for $5.6 million. Some are questioning the credibility of this statement.

Bernstein analyst Stacy Rasgon expressed skepticism, emphasizing that the actual costs associated with developing DeepSeek’s model likely far exceed the amount claimed. He pointed out, “Did DeepSeek really ‘build OpenAI for $5M?’ Of course not,” noting that many incurred expenses were omitted from their report.

This unexpected news led to widespread investor worry, with fears that more advanced AI models would translate to reduced demand for Nvidia’s technology. However, the Jevons paradox suggests that improvements in efficiency often lead to increased market demand, indicating that lower-cost AI solutions could actually enhance the demand for Nvidia’s products.

Cantor Fitzgerald analyst C.J. Muse echoed this sentiment, stating that innovation is driving down adoption costs, making AI more accessible. This will likely require a continuous increase in computing power, suggesting a positive outlook for Nvidia.

On Tuesday, Tigress Financial upgraded Nvidia to a “strong buy” status with a new price target of $220, signaling a potential 71% upside based on prior closing prices. The firm is optimistic that the growing data center sector essential for AI will sustain Nvidia’s profitability, especially since the company holds a substantial share of the GPU market.

Despite the shake-up, Wall Street analysts remain largely supportive of Nvidia. A striking 94% of analysts—out of 63 surveyed in January—advise buying or maintaining the stock, with none suggesting a sell. This reflects a durable faith in Nvidia’s long-term prospects, even in light of DeepSeek’s assertions.

Insights from Financial Analysts

On January 27, a panel of analysts from The Motley Fool discussed DeepSeek’s announcement. Noteworthy points included:

• The group’s consensus questioned whether deep learning truly cost just $5.6 million to develop. Their review suggested this price only accounts for the latest version, excluding previous developmental costs.
• DeepSeek’s AI assistant recently topped the charts as the most downloaded free app on the Apple Store. However, there were inconsistencies noted between download figures and actual usage, leading to skepticism about the accuracy of these stats.
• Even if the developments signal a significant technological leap, the need for Nvidia’s high-performance processors is likely to remain strong, as they are vital for training AI models.
• The panel generally noted that Nvidia’s high valuation could result in market volatility, challenging investors’ resolve.

Taken together, the evidence points to the notion that DeepSeek’s announcement may represent an expected progression in technology rather than a groundbreaking shift.

As the AI sector continues to evolve, more surprising developments are likely to arise in the near future. Some investors may have hastily exited Nvidia’s stock following Monday’s news, but reacting too quickly to such events can lead to missed opportunities.

Data by YCharts

Currently, Nvidia’s stock trades at about 50 times earnings. While some value investors might find this alarming, it is significantly lower than Nvidia’s average P/E ratio of 81 over the last five years. Additionally, during this timeframe, the stock has surged over 2,000%, highlighting its historical worthiness.

Considering the company’s established track record in innovation, Nvidia remains a compelling investment choice.

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Danny Vena has positions in Apple and Nvidia. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool has a disclosure policy.

The opinions expressed are those of the author and do not necessarily reflect the views of Nasdaq, Inc.