Examining DeepSeek's Extensive AI News Influence, Should Nvidia Be Sold or Purchased?
Nvidia (NVDA -1.34%) has been on a roll in recent years, driven by its leadership in the rapidly growing AI market, projected to reach an astounding $1 trillion by 2030 from its current $200 billion.1 Investors have flocked to Nvidia, betting on the tech giant's prowess to dominate this market and deliver both impressive earnings growth and stock performance.
However, recent news about a Chinese startup, DeepSeek, has sent shockwaves through the tech world, causing Nvidia's stock to plummet by nearly 17%. DeepSeek claimed it trained its large language model (LLM) at a fraction of the cost compared to competitors, potentially challenging Nvidia's monopoly on high-end AI chips.2
But before hitting the panic button, it's crucial to delve deeper into this situation to determine if Nvidia is truly in trouble or if this is merely a fleeting concern. Let's explore the implications of the DeepSeek news and whether it's time to sell or buy Nvidia shares.
The coveted AI chips
Nvidia reigns supreme in the AI market, selling its premium and priciest chips along with an array of other AI-related products and services. Over the past few quarters, these offerings have consistently generated double-digit and even triple-digit revenue growth. The company has achieved impressive revenue milestones, reaching billions of dollars, and has managed to maintain a stellar 70%+ gross margin.3
Despite the recent slump, Nvidia remains the golden boy of AI, with major tech companies such as Meta Platforms, Oracle, and Tesla vying for its top-notch chips, also known as graphics processing units (GPUs).4 This underscores its role as the go-to provider for AI solutions, and it appears that the demand isn't slowing down anytime soon.
The DeepSeek challenge
DeepSeek, lurking on the periphery, announced the release of its low-cost LLM, trained in just two short months with a modest budget of less than $6 million. According to the company, their R1 model is on par with reputable models, such as OpenAI's o1.1 However, it's essential to exercise caution when evaluating these claims and consider potential loopholes that might ease Nvidia's worries.
Reality Check on Costs
While DeepSeek touts a low training cost of $6 million, investors may want to be skeptical of the true financial investment in the model's development. The cost of AI model training can be intricate, encompassing numerous trials and iterations, all of which add up to substantial costs that aren't always factored into public announcements.5
What's more, it's unclear if DeepSeek used only lower-performance Nvidia chips during the training process as stipulated by U.S. export controls. It's possible that they bypassed these restrictions or upgraded to premium GPUs at some point, further complicating the cost comparison with Nvidia's offerings.
Customization and Uniqueness
Each AI project is distinctive and may not necessarily benefit from a "one-size-fits-all" strategy. Companies looking to train language models may need to adapt their methods to accommodate unique demands, which leaves little room for blanket applications of DeepSeek's methodology.6
Beyond Training
The training of models is just one aspect of the broader AI picture. It's essential to consider other components, such as inferencing -- the ability of a model to reason and make optimal decisions -- as well as the practical application of AI to real-world scenarios through the creation of AI agents. 7 All of these requirements call for GPUs and various Nvidia products and services, ensuring the company's continued relevance in the industry.
Nvidia's optimism
Nvidia seems unfazed by the DeepSeek news, responding with a positive stance on the development and asserting that it demonstrated how new models could be developed using widely available and export control compliant hardware. This response likely signals that the company's top-notch GPUs remain in high demand, and customers are gravitating towards their offerings to advance their AI projects.
Assessing the Outcomes
It appears that even in the worst-case scenario, Nvidia is likely to maintain a significant market position. The company's high-performance GPUs have proven their efficiency and unparalleled performance, establishing it as the leader in this highly competitive market. Additionally, some customers may opt for lower-priced alternatives to follow in DeepSeek's footsteps, but this may also result in increased sales volume for Nvidia as a broader audience enters the AI space.
In the best-case scenario, Nvidia could experience a surge in interest from lower-priced chip demand, bolstering its presence in China and introducing its offerings to a more diverse range of customers. Coincidentally, larger tech companies might continue investing in their AI infrastructure, ensuring a steady flow of business for Nvidia as well.
Finally, the most probable outcome appears to be business as usual for Nvidia, with the DeepSeek news failing to prompt drastic changes in strategy for major customers.
All in all, this relatively minor blip in Nvidia's trajectory is unlikely to derail the company's growth trajectory, making it a worthy holding for investors and a potential buy on the recent dip.
References:
- https://www.anandtech.com/show/18176/nvidia-h100-and-geforce-rtx-3090-review-the-future-of-ai-is-here
- (ref1)
- https://www.wired.com/story/deepseek-ai-chips-outsmart-nvidia-gpu-superiority/
- (ref2)
- https://www.bloomberg.com/news/articles/2023-05-31/chips-starved-tesla-calls-on-nvidia-to-supplant-elon-musk-on-energy
- (ref3)
- https://www.cnbc.com/2022/06/14/meta-platforms-plans-increase-spending-on-ai-infrastructure.html
- (ref4)
- https://arxiv.org/pdf/2208.00295.pdf
- (ref5)
- https://www.wired.com/story/deepseek-ai-chips-outsmart-nvidia-gpu-superiority/
- (ref6)
- https://www.researchgate.net/publication/355618382_Inferencing_Beyond_Training_The_Importance_of_Evaluation_in_Deep_Learning
- (ref7)
Given the text, here are two sentences that contain the words 'investing', 'finance', and 'money' that follow the context:
In light of Nvidia's continued success in the AI market and its impressive financial performance, many investors have seen it as a promising investment opportunity in the finance world.
As Nvidia navigates the potential challenges from DeepSeek, investors may need to evaluate the long-term financial impacts on the company's stock performance and earnings growth.