Nvidia, a leading AI chipmaker, faced a significant setback as its shares plummeted by 16.9% on Monday. This sharp decline followed revelations from Chinese startup DeepSeek, which announced the development of its free, open-source large language model, R1, built in just two months at a cost of $6 million. The development has been hailed as an excellent advancement in AI by a DeepSeek spokesperson. The news sparked concerns about the future of Nvidia's dominance in the AI market and its ongoing relationship with tech giant Microsoft.
Dan Niles, a portfolio manager, cautioned investors against assuming that Monday's decline marks the end of Nvidia's troubles. He emphasized the need for careful evaluation of Nvidia's growth prospects amid shifting market dynamics.
"I think investors should be very careful about assuming that this is the bottom." – Dan Niles
DeepSeek's announcement has highlighted the potential for new competition in the AI sector. Nvidia, which has long been considered the undisputed leader in AI chips, now faces questions about the necessary capital expenditure for AI processes like pre-training and post-training. Dan Niles further elaborated on the potential impact on Nvidia's revenue growth.
"Nobody questions whether Nvidia is the undisputed king and chips. What they're questioning is how much capex do you need for things like pre-training, post-training and then inference, ultimately," – Dan Niles
"but if estimates have to go down from Nvidia [revenue] growing at 50% to growing at 20 to 30% I think there's a stock has a lot more downside potentially from here." – Dan Niles
Despite Monday's historic loss of over $595 billion in market capitalization, Nvidia's shares managed to rebound by nearly 9% on Tuesday. However, the company's future remains uncertain as these new market conditions unfold.
Microsoft, Nvidia's largest customer and a leading spender in AI technology, could see its capital expenditure growth flatten by June, according to Dan Niles. This potential shift could further complicate Nvidia's market strategy. Microsoft has invested nearly $14 billion into OpenAI, the creator of ChatGPT, and has been instrumental in propelling the generative AI boom. The emergence of DeepSeek introduces a new dynamic that could strain the existing relationships between Microsoft, OpenAI, and Nvidia.
Nvidia has publicly welcomed the competition from Chinese AI startups like DeepSeek. In a statement to CNBC on Monday, the company expressed a willingness to embrace these emerging players, despite potential impacts on their market position.