The stock market’s reaction to the release of China’s novel artificial intelligence (AI) model DeepSeek has been both bearish and violent as it saw the shares of many major players in the sector – most notably Nvidia (NASDAQ: NVDA) – swiftly plummet.
Though NVDA regained some ground in recent trading and is, at press time on February 7, changing hands at $128.63, the plunge can still be felt as it is 8.20% in the red in the last 30 days and the question of when it will fully negate the 16.97% DeepSeek plunge from $142.62 to $118.42 remains open.
Still, many believe that the investors’ reaction to the novel model has not only been overblown but also entirely wrong in its direction.
Why DeepSeek shocked big tech investors
Specifically, traders appear to have been unnerved by the reported low costs of developing DeepSeek, as well as by the fact it could be freely replicated thanks to the creators’ decision to make it open source.
Given the costs were estimated at approximately $6 million and hundreds of billions were poured into Western big tech for its AI programs, some have even taken to speculating the competitor from China could generate an ‘extinction’ event for many venture capital firms.
Still, the terror unleashed by DeepSeek arguably obscured the fundamental fact that strong competition tends to lead to better outcomes and that the fact that technological breakthroughs tend to accelerate advancements, not halt them.
Indeed, though their perceived monopoly might have been diminished, Western big tech firms are likely to utilize the lessons learned from DeepSeek and combine them with their vast and robust infrastructure to create significantly more sophisticated models. At the same time, the efficiency of systems can enable more people to utilize AI freely.
The Stargate puzzle
One of the reasons the reaction to DeepSeek was as violent is that it came uncomfortably quickly after the unveiling of The Stargate Project, a $500 billion AI infrastructure development project enabled by the participation of some of the biggest players in the sector, such as SoftBank (TYO: 9984), OpenAI, and Microsoft (NASDAQ: MSFT).
Though the rationality of the money allocation can and should be examined and reexamined, it is highly unlikely that a more efficient model will render the investment superfluous. The proliferation of the internal combustion engine did not halt road investments but only made them bigger and more important for daily life.
DeepSeek’s own performance – whether it be a malicious attack or simply the scale of the organic traffic – serves as a strong testament to the benefits of having developed AI infrastructure.
Specifically. anyone who has been using the novel platform was met with, on multiple occasions, the ‘the server is busy’ message and faced additional issues when trying to utilize the more advanced features such as the web search functionality and DeepThink.
Why Nvidia could still be the winner of the next phase of AI
Nvidia is particularly well-positioned to benefit from the latest shift in the industry as the proverbial ‘shovel seller’ of the ongoing gold rush. Indeed, unlike the companies behind other AI platforms, the semiconductor giant has been the great supplier of tools needed to operate AI.
Under the circumstances, the need for the chipmaker’s products will probably only increase in the long term as, on the one hand, the major companies in the industry implement DeepSeek’s breakthroughs and scale up and, on the other hand, numerous smaller entities begin hosting their own versions due to the open source nature of the Chinese model.
Why Nvidia stock remains a fraught bet
Despite this, NVDA stock is not an entirely safe bet. Despite being undeniably the bigger company, the relatively small difference between Nvidia’s revenue and profits hardly justifies the vast difference in valuation or stock market performance between it and its main competitor, Advanced Micro Devices (NASDAQ: AMD).
Simultaneously, the announced and implemented tariffs also provide for strong headwinds for the chipmaking powerhouse as it is, much like many other technology firms, dependent on the global trade and supply networks that have developed in recent decades and, arguably, recent centuries.
Finally, Nvidia’s status as the main ‘shovel seller’ could also eventually be at risk as history shows that China has been relatively successful in developing domestic alternatives and particularly keen on making such advancements when its access to foreign goods is restricted, as in the case of Joe Biden’s exports limitation and possibly the new Trump tariffs.
Featured image via Shutterstock
Source: https://finbold.com/why-deepseek-might-be-the-strongest-nvidia-stock-bull-case/