Nvestigating Nvidia's Stock Plummet.
Why did Nvidia's stock experience one of its worst days since 2020?
Nvidia. Every investor and media outlet’s favourite stock in 2024. Before the surge in AI interest, many people, especially outside the tech community, may not have been familiar with Nvidia. However, as a gamer, I was aware of Nvidia due to its reputation for designing graphics processing units (GPUs) that power some gaming consoles and PCs. To understand Nvidia's significance, it's essential to delve into the company’s background and its pivotal role in both the gaming and AI sectors.
Who/What is Nvidia?
Nvidia is a prominent American technology company recognised for its design of GPUs. These GPUs are extensively utilised across various sectors, including gaming, artificial intelligence (AI), data centres, and professional applications. Established in 1993 and headquartered in Santa Clara, California, Nvidia has evolved into a significant force within the semiconductor industry.
Nvidia shares experienced a remarkable increase of 170% by the end of 2024, driven by a surge in demand for its semiconductor products. Major technology companies, including Microsoft, Meta, and Alphabet's Google, have significantly invested in enhancing their AI data centre and cloud computing infrastructures. This substantial growth followed an impressive 240% rise in the company's stock price in 2023. 1
As of writing, Nvidia's market capitalisation stands at $2.884 trillion, making it the third-largest company by market cap, following Apple and Microsoft. 2Clearly, Nvidia is a significant player in the GPU market. However, on Monday, January 27, Nvidia's shares saw a drastic decline of nearly 17%, resulting in a historic loss of nearly $600 billion. 3 What caused this substantial drop?
Arrival of DeepSeek
Two weeks ago, the Chinese company DeepSeek released R1, an AI model that appears to rival the capabilities of models from major US tech companies like OpenAI’s ChatGPT and Google’s Gemini, even though it operates on fewer and less powerful chips. US investors began to notice R1, and over the weekend, they started to worry about its implications for highly valued US tech stocks, which led to significant market movements last Monday.4 But what does a Chinese AI model have to do with Nvidia?
Nvidia’s earnings and stock price have soared in the past two years as tech giants like Microsoft, Alphabet (Google) and Amazon have spent massively on their AI systems.
Source: Yahoo! Finance
As we can see from the graph above, we can see that from 1 February 2023, Nvidia’s share price was $14.84 and at close on 31 January 2025, the share price was at $120.07. That shows a staggering 709% surge in share price in the space of two years. The primary cause for this surge in share price is due to the explosion of AI, particularly their AI chips - which Nvidia makes. The GPUs Nvidia makes are essential for training and running AI models, and using the simple law of economics about supply and demand, Nvidia’s AI chips are high in demand whilst low in supply - allowing them to charge premium prices for their chips.
DeepSeek’s arrival caused investors to question whether all that spending was necessary and, if not, why it should continue. I mean why would one continue paying billions to Nvidia when it’s evident that you can get cheaper chips elsewhere? DeepSeek has become the most downloaded free app in the US just a week after it was launched.5 The question is, will the arrival of DeepSeek have long-term implications for Nvidia or it is simply an overreaction by the stock markets?
Buying Opportunity
Dan Ives from Wedbush Securities highlighted in a recent morning note that the decline related to AI stocks presents a unique buying opportunity, especially for Nvidia. 6
"No US Global 2000 is going to use a Chinese start-up DeepSeek to launch their AI infrastructure and use cases," he wrote. "At the end of the day there is only one chip company in the world launching autonomous, robotics, and broader AI use cases and that is Nvidia. Launching a competitive LLM model for consumer use cases is one thing ... launching broader AI infrastructure is a whole other ballgame and nothing with DeepSeek makes us believe anything different."
Source: Business Insider: Markets Insider (see footnote 3)
According to the Wall Street Journal, retail investors have increasingly focused on Nvidia, particularly in light of recent market fluctuations. Following a pronounced drop in Nvidia's stock price on January 27, 2025—driven by apprehensions regarding competition from the Chinese AI startup DeepSeek—individual investors were quick to capitalise on the situation by "buying the dip." On that day, retail traders made a record purchase of $562 million worth of Nvidia shares, reflecting their strong interest in the company amidst the volatility. 7
As reported by the Financial Times, during the past week, retail investors demonstrated significant enthusiasm, investing over $900 million in Nvidia stocks. Analysts indicate that although advancements by DeepSeek may decrease the reliance on Nvidia chips, the overall increase in AI efficiency could lead to higher demand across the sector. This trend may ultimately provide long-term benefits for Nvidia. 8
Additionally, DeepSeek does pose some privacy issues and national security threats due to its ties to Beijing.
Privacy Issues and Security Threats
DeepSeek is a Chinese artificial intelligence company established in late 2023 by hedge fund manager Liang Wenfeng. The company operates as a privately held entity and is reportedly self-funded, without significant backing from major venture capital firms. 9
The company has come under scrutiny regarding its potential connections to the Chinese government. Founder Liang Wenfeng recently met with Premier Li Qiang, which underscores the company's significant role within China's technology sector.10 Moreover, DeepSeek's AI models have been reported to comply with Chinese government censorship guidelines, leading to concerns about the impact of state policies on the company's operations.11
As of February 3, 2025, several regions have implemented bans or restrictions on the use of DeepSeek due to security and data privacy concerns:
Taiwan: The Taiwanese government has officially prohibited all government departments from using DeepSeek's artificial intelligence services, citing potential security risks and concerns over data being transferred to China.
Italy: Italy's data protection authority has blocked access to DeepSeek, expressing apprehension about the application's handling of personal data and its compliance with data protection regulations.
Texas, USA: Texas has become the first U.S. state to ban DeepSeek on government-issued devices, driven by fears that user data could be accessed by the Chinese government.
Additionally, other countries, including South Korea, France, and Ireland, are scrutinising DeepSeek's data handling practices, though formal bans have not been enacted in these nations as of this date. 12 This is the same reasons as to why TikTok was temporarily inaccessible to US users and is currently an ongoing political issue.
Conclusion
The launch of DeepSeek has had significant repercussions in the stock markets, especially for technology stocks, and has contributed to greater transparency in the AI sector. Despite this, Nvidia remains strategically positioned within the industry, suggesting a strong potential for sustained long-term success. For personal tasks, many users may prefer ChatGPT due to its user-friendly interface. I even used ChatGPT to assist me in researching for this post. However, for coding and mathematical tasks, DeepSeek offers superior performance, particularly for developers. The introduction of DeepSeek and similar competitors is expected to enhance the overall AI industry by providing users with more choices, which could pressure established companies like OpenAI and Google to enhance their platforms. This competitive landscape is likely to create a sustained demand for Nvidia’s GPUs, potentially leading to increased earnings for the company.
Disclaimer: The content provided on Lincoln Green Finance is for informational and educational purposes only. It represents the writer’s personal opinions and should not be construed as financial advice. The views expressed here are based on the writer’s research and experience, but they do not constitute a recommendation to buy, sell, or hold any specific stocks or financial instruments. Investing in the stock market involves risks, and you should always conduct your own due diligence or consult with a qualified financial adviser before making any investment decisions. I am not responsible for any financial losses incurred as a result of using the information provided in this post.
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