Nvidia: Evaluating the Future Amid Market Challenges

Nvidia’s stocks have climbed under 3% since the beginning of the year, indicating a pause in its remarkable rally. Investors are now expressing caution for several reasons.

While generative AI software remains unprofitable, emerging open-source competitors from China may threaten major customers like OpenAI and Meta Platforms. Let’s explore whether Nvidia’s stock should be a buy, sell, or hold heading into 2025 and beyond.

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Anticipation Builds for Fourth-Quarter Earnings

Nvidia plans to reveal its fourth-quarter and full-year earnings on Feb. 26. Investors are looking forward to insights on its growth potential and the overall health of the AI sector, which is currently tackling high expenditures and profitability concerns (OpenAI recorded losses of $5 billion in 2024).

Management has expressed optimism, projecting about $37.5 billion in revenue, which suggests a strong 70% growth compared to last year. Notably, this growth is a slowdown compared to last year’s remarkable 265% jump but is still commendable for a company valued at $3.4 trillion.

In contrast, Amazon’s latest growth stood at only 10% for its most recent quarter.

Nvidia’s continued success hinges on launching new graphics processing units (GPUs) aimed at efficiently running and training AI models. The latest Blackwell chips are set to be priced between $30,000 and $40,000, but their exceptional performance justifies the investment, potentially offering savings on operational costs compared to older models.

Assessing the Challenge Posed by DeepSeek

The debut of the DeepSeek R1, an open-source large language model (LLM), has raised concerns for Nvidia’s future growth. This Chinese application reportedly matches or surpasses ChatGPT on several tasks while being developed for just $5.6 million — a figure achieved using less advanced Nvidia H800 chips to comply with U.S. export regulations.

If companies can create LLMs using older technology, this may threaten Nvidia’s premier hardware offerings, potentially curtailing its growth and profit margins. However, not all news is bleak for Nvidia and its shareholders.

Image source: Getty Images.

Nvidia’s fiscal report for the fourth quarter will largely reflect the three months ending January 2025, when DeepSeek’s release occurred, suggesting minimal immediate impact on guidance.

Moreover, experts have questioned DeepSeek’s cost efficiency, with SemiAnalysis estimating a hardware expenditure over $500 million rather than the claimed $5.6 million. The application also faces scrutiny regarding its data safety and has been removed from South Korean app stores due to privacy violations.

Significantly, major clients like Meta Platforms continue to express their commitment to acquiring AI hardware. CEO Mark Zuckerberg has stated that despite potential competition from DeepSeek, they are planning extensive investments into AI over the long term.

Investment Outlook: Buy, Sell, or Hold?

Currently, DeepSeek appears unlikely to disrupt Nvidia’s performance in the fourth quarter or through 2025. Furthermore, the impending launch of new Blackwell AI chips is expected to contribute to sustaining Nvidia’s strong growth trajectory. With a forward price-to-earnings ratio (P/E) of 32, the stock remains reasonably valued relative to its fundamentals.

However, the outlook suggests a hold rather than a buy. While DeepSeek may not cause immediate turmoil in the generative AI market, it serves as a reminder of potential vulnerabilities, especially considering that leading LLMs like ChatGPT are still unprofitable. Despite Nvidia’s appealing valuation, it reflects the speculative nature of the industry.

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Randi Zuckerberg, former Facebook market development director and sister to Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board. John Mackey, the former CEO of Whole Foods Market, also holds a position on the board. Will Ebiefung has no investment in the mentioned stocks. The Motley Fool is invested in and recommends Amazon, Meta Platforms, and Nvidia. The Motley Fool adheres to a disclosure policy.

The views expressed in this article are solely those of the author, and do not necessarily represent the opinions of Nasdaq, Inc.