Nvidia Stock Plunges 11% on DeepSeek Threat, But is Wall Street Overreacting?

Nvidia (NVDA) stock is practically synonymous with the artificial intelligence (AI) revolution. NVDA has surged over 640% in the past two years, driven by its leadership in AI technology and the growing demand for its GPUs in AI applications. However, the sudden emergence of DeepSeek, a Chinese AI startup, has introduced potential competition that could impact Nvidia's market dominance.

As a result, NVDA is down more than 11% ahead of the opening bell this Monday, leading a broad-based sell-off in some of Wall Street’s biggest AI stocks. The early plunge has NVDA stock on pace to open near its 200-day moving average, which hasn’t been meaningfully tested in two years.

Among the other early decliners this Monday are mega-cap AI hyperscalers Meta Platforms (META), off 2.6%; Anthropic backer Amazon (AMZN), down 4.3%, and OpenAI investor Microsoft (MSFT), off 4.8%. This broader sell-off in tech stocks reflects serious investor apprehension about the valuations and future profitability of AI-related companies.

The DeepSeek model was reportedly created on a relative shoestring budget of $5.6 million, which has sparked fears of reduced demand for Nvidia's high-end products. Investors are now pricing in concerns that the rise of cost-effective alternatives like DeepSeek's model could reshape the competitive landscape in the AI sector. DeepSeek’s model has so far outperformed Meta’s Llama 3.1, OpenAI’s GPT-4o and Anthropic’s Claude Sonnet 3.5 in accuracy, and it was created using Nvidia’s lower-capacity H800 chips.

However, some analysts suggest that the long-term implications could include a more widespread adoption of AI technologies, potentially benefiting the sector in the future. 

“Innovation is driving down cost of adoption and making AI ubiquitous,” wrote analyst C.J. Muse of Cantor Fitzgerald. “We see this progress as positive in the need for more and more compute over time (not less).”

Additionally, Bernstein’s Stacy Rasgon points out that the much-hyped $5.6 million figure to build DeepSeek “does not include all the other costs associated with prior research and experiments on architectures, algorithms, or data,” and adds that demand for chips should remain healthy.

That means Nvidia's strong position in the AI chip market and ongoing demand for its products should continue to support its growth prospects over the long term, which means today’s panic selling could ultimately prove to be a buy-the-dip opportunity for NVDA stock.