Nvidia Stock Takes a Hit as China's DeepSeek Unveils Competitive AI Model

Nvidia (NVDA) saw a significant drop of up to 14% in pre-market trading on Monday. This decline came after Chinese artificial intelligence startup DeepSeek launched a new model that may threaten the competitive edge of American firms in the AI sector.

DeepSeek's New Model

In December, DeepSeek introduced a free, open-source large language model (LLM) that had been developed in just two months at a cost of less than $6 million. Recently, the company announced the release of a model that rivals well-known products like OpenAI's ChatGPT and Meta's Llama 3.1. This new model quickly gained traction, even reaching the top of Apple's App Store over the weekend.

The Impact on Nvidia

One major factor causing concern among Nvidia and its investors is that DeepSeek created its model using Nvidia's less powerful chips. If other companies begin to shift away from Nvidia's premium chip offerings, it could have a detrimental effect on the company's market position.

Analysts at Wedbush pointed out in their research note that tech stocks are facing considerable pressure, particularly Nvidia, as DeepSeek is seen as a significant threat to U.S. technological dominance in the AI revolution.

Market Reactions

On Monday morning, Nvidia's shares were down nearly 12%. This news negatively affected other major semiconductor stocks as well, including ASML, which fell by 7%, and Broadcom, which dropped by 12%. These declines contributed to a substantial sell-off in the tech-heavy Nasdaq index, with pre-market futures striking almost 4% lower.

Valuations and Future Concerns

According to Charu Chanana, chief investment strategist at Saxo, U.S. tech companies such as Nvidia, Microsoft, and Alphabet are trading at high valuations. These firms command price-to-earnings multiples that are significantly above historical averages. With these valuations, even minor updates and advancements, like those from DeepSeek that demonstrate advanced AI can be built without high-end chips, could lead to considerable drops in share prices.

Outlook on AI Development

Despite the impressive nature of DeepSeek's new model and its potential ripple effects, some analysts believe that investor concerns are overblown. They argue that leading U.S. tech companies continue to focus on achieving artificial general intelligence (AGI) within the next few years. According to Wedbush analysts, although DeepSeek poses some risks, U.S. tech and the so-called “Magnificent Seven” companies are well-positioned in terms of infrastructure and resources to stay ahead in the AI race.

Nvidia, AI, DeepSeek