Why Did Apple and Meta Platforms Rise While Nvidia Fell 17% in 1 Day?

On January 27, the stock market experienced significant fluctuations as investors responded to the announcement of a new AI model developed by a Chinese start-up called DeepSeek. This model, known as the R1 "reasoning" model, is seen as a competitor to OpenAI's o1 model.

In this volatile trading session, semiconductor companies like Nvidia (NVDA), Broadcom, and Taiwan Semiconductor Manufacturing suffered notable losses, with share prices declining between 13% and 17%. These companies together represent a staggering market capitalization of over $5 trillion.

Despite the tumble in the semiconductor sector, other parts of the market showed resilience. Tech giants like Apple (NASDAQ: AAPL) saw an increase of 3% in their stock price, while Meta Platforms (META) also gained 2% during the same period.

This article will explore the market's reaction to DeepSeek's development and discuss why Meta Platforms is being recognized as a leading AI stock.

Impact of AI Efficiency Improvements

Reports indicate that DeepSeek managed to create its AI model at a significantly lower cost compared to OpenAI's approach. This revelation raised concerns about a potentially decreased demand for essential AI infrastructure, particularly Nvidia's graphics processing units (GPUs) and Broadcom's application-specific integrated circuits.

This development could signify a shift in how investors perceive AI investments. A notable initiative, backed by Donald Trump, is the $500 billion Stargate AI project, which aims to enhance data centers to make AI workflows more efficient. Additionally, Microsoft is anticipated to invest roughly $80 billion in AI by fiscal 2025. As AI tools become cheaper to produce, there is growing scrutiny on how companies allocate their spending in this space. Investors may be less inclined to support organizations just for spending heavily on AI if they do not see positive returns.

Interestingly, Nvidia rebounded by 9% the day after its decline on January 28. Some investors and analysts began viewing the efficiency improvements as a potential benefit, suggesting that if AI solutions become more affordable, the overall demand for computational power might increase, opening doors for smaller companies to enter the market.

This situation can be likened to the pricing trajectory of the iPhone. When the first model was introduced in 2007 for $499, it would equate to about $780 today when adjusted for inflation. Despite advancements in technology and increased storage capacities, the starting price of the recent iPhone 16 remains at $799. Apple has managed to grow significantly, offering expanded services and accessories as it became a staple commodity. Similarly, Nvidia might benefit from a growing market for its products, becoming less dependent on pricing power over time.

Remarkably, as of January 24, Apple was the weakest performer in the Dow Jones Industrial Average for the year. Therefore, a rebound in Apple’s stock makes sense, especially since it may be viewed differently from pure AI stocks like Nvidia. The rise of Meta is perhaps even more surprising, as it achieved all-time highs this week.

Meta as a Strong AI Investment

Back in October, I predicted that Meta would surpass tech giants like Alphabet and Amazon in value by the year 2026, and I still believe that to be the case.

Meta exemplifies how AI can accelerate growth and enhance profit margins. AI plays a crucial role in optimizing Meta's algorithms, helping to deliver engaging content that keeps users interacting with the platform, thus increasing ad revenue. Additionally, Meta leverages AI to assist creators in tailoring their content and engaging better with their audiences.

Although Meta is directing substantial funds toward research and development (R&D), it still experiences rapid revenue and operating income growth. The company maintains operating margins of about 40%, with 27 cents of every revenue dollar allocated for R&D.

Even when accounting for the substantial losses from Meta's Reality Labs division, which focuses on hardware and metaverse software—and invests in AI—the company's financials remain strong. In the initial nine months of 2024, Reality Labs incurred losses of $12.76 billion, while Meta's net income stood at $41.52 billion. Therefore, the valuation of Meta's core advertising business, after excluding Reality Labs, becomes significantly more attractive for investors.

Investing in AI Stocks

The recent decline in Nvidia's stock serves as a reminder of the need to understand one's investments deeply and to align them with individual risk tolerance.

Nvidia is undoubtedly a highly innovative company, but its current valuation hinges on continuous rapid earnings growth. In contrast, Meta is a better value investment as its earnings growth might not be as rapid as Nvidia's.

Nevertheless, Nvidia remains a candidate for investors with higher risk tolerance who believe in its long-term potential in the AI industry. That said, volatility is likely to persist as investors reassess Nvidia's future role in AI.

Apple, Meta, Nvidia