DeepSeek’s R1 Model Sparks Market Shifts: Meta vs. Nvidia

DeepSeek has made headlines in the artificial intelligence (AI) sector, emerging with its new R1 large language model (LLM) that reportedly competes closely with OpenAI’s o1 model. Distinct from its competition, DeepSeek offers a more cost-effective solution, which has resulted in notable market reactions.

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Why Meta May Be More Resilient

Nvidia’s stocks dropped sharply by 17% following the announcement of DeepSeek’s new model. However, Meta Platforms (NASDAQ: META) saw a minor uptick instead. The difference in reactions can be attributed to how each company might be affected by DeepSeek’s advancements. Meta appears less vulnerable to the shakeup than Nvidia.

Yann LeCun, Meta’s chief AI scientist, shared his insights regarding DeepSeek’s R1 launch. He noted that “open source models are surpassing proprietary ones.” LeCun emphasized that DeepSeek built their model using principles and technologies developed through open research, allowing collective benefits across the industry.

DeepSeek has profited from open research and open source (e.g., PyTorch and Llama from Meta). They came up with new ideas and built them on top of other people’s work. Because their work is published and open source, everyone can profit from it. That is the power of open research and open source.

If LeCun’s assessment holds true, Meta’s own open-source model, Llama, could potentially gain from DeepSeek’s innovations. Mark Zuckerberg also expressed optimism on the same day, stating that “In 2025, I expect Meta AI will be the leading assistant serving more than 1 billion people” and predicted Llama 4’s ascent to the top tier of AI models, signaling confidence amid the shakeup.

As Meta invests heavily in infrastructure to support AI, advances that drive down costs can only benefit the company. Zuckerberg highlighted plans for a massive data center that would have a significant footprint, emphasizing Meta’s aggressive approach.

In terms of valuation, Meta’s stock appears more affordable compared to Nvidia. Meta trades at a forward price-to-earnings ratio of 24.5, contrasting with Nvidia’s higher multiple of 33.3.

Nvidia’s Case: Overreaction or Real Concern?

Amidst the turmoil, some analysts suggest Nvidia’s drop might be exaggerated. LeCun himself argued that the market’s reaction to DeepSeek’s news is overblown. Portfolio manager John Belton from Gabelli Funds highlighted concerns over misleading reports regarding the R1 model, noting the complexities behind DeepSeek’s operations.

The discussion also points to the Jevons Paradox, which suggests that efficiency gains can lead to increased overall usage. Consequently, higher demand for Nvidia’s GPUs may arise, rather than a decline.

It remains unlikely that organizations will abandon their purchases of Nvidia’s new Blackwell chips in light of DeepSeek’s release. Strong financial results are expected from Nvidia in its upcoming quarterly reports.

Once the initial reaction subsides, Nvidia could regain investor interest. Historically, buying Nvidia during dips has proven beneficial.

A Personal Conclusion

Given the current landscape, my instinct suggests Meta could be the more sound investment post-DeepSeek’s introduction—at least for the immediate future.

According to Gabelli’s Belton, DeepSeek’s emergence raises potential challenges for Nvidia. He suspects it might take time for Nvidia’s stock to recover. I share this perspective, but I acknowledge that innovations from competitors often push established companies to rise to the occasion. Nvidia’s track record indicates it can adapt and continue to be a strong long-term investment.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.

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