2 Artificial Intelligence (AI) Stocks to Watch After DeepSeek's Breakthrough

A relatively small Chinese artificial intelligence (AI) start-up has developed a large language model (LLM) generative-AI chatbot that seeks to compete with OpenAI's ChatGPT. However, the real news came in January when the company announced that it reportedly trained its model using only $6 million and a few thousand Nvidia (NVDA) graphics processing units (GPUs). This contrasts sharply with what U.S. tech companies typically invest, spending billions and acquiring hundreds of thousands of GPUs for similar projects. For example, the Colossus supercomputer, developed by Elon Musk's company xAI, is reported to be equipped with 100,000 GPUs, with plans to expand that number to 1 million. The announcement from DeepSeek sent shockwaves through Wall Street, raising questions about whether tech giants could reduce their spending on servers and GPUs.

The Implications for Nvidia

Despite initial fears regarding the implications of DeepSeek's claims, it appears that Nvidia is unlikely to be in serious trouble. Both Amazon (AMZN) and Alphabet (GOOGL) have reaffirmed their substantial capital expenditure budgets during their latest earnings calls, with much of this investment directed towards data center infrastructure, including Nvidia GPUs. Additionally, xAI is reportedly nearing a $5 billion deal with Dell (DELL) for data center infrastructure, which would further cement the demand for Nvidia products.

Nvidia's fiscal 2025 has already shown impressive results even with three quarters reported, indicating continued success ahead.

However, it is important to note that many AI industry experts are skeptical of DeepSeek's claims, suggesting that the company may have spent significantly more and used thousands more GPUs than it claims.

As a result of the DeepSeek announcement, Nvidia's stock experienced a decline, with its forward price-to-earnings (P/E) ratio currently at 31, down from a recent peak of 50 and closer to troughs seen during previous pullbacks in early 2023 and 2024. These earlier dips have proven to be opportune times for investors.

Dell's Rising Data Center Revenue

Turning to Dell, the company operates in two segments: the Infrastructure Services Group (ISG), which provides products for data centers, and the Client Services Group (CSG), which sells laptops, computers, and accessories. In the latest quarter, Q3 fiscal 2025 (ending Nov. 1), ISG revenue surged by 34% year-over-year to reach $11.4 billion, with operating income climbing 41% to $1.5 billion. The anticipated deal with xAI would further boost ISG revenue.

On the other hand, CSG sales fell by 1% to $12.1 billion as the consumer market continues to struggle, though the segment still managed a modest operating profit of $700 million. Dell's future success will depend on its ability to grow within the data center infrastructure sector.

For investors, Dell currently offers a dividend yielding 1.5%, which was recently increased by 20%, with a commitment to a 10% annual increase through fiscal 2028. Similar to Nvidia, Dell's stock price fell following the DeepSeek announcement and is trading substantially below recent highs.

Currently, Dell's stock price is more than 20% below the average analyst target of $150 per share. Investors will be closely monitoring for any signs of a slowdown in data center construction or Nvidia sales, but thus far, there is no evidence to suggest that either is occurring. This indicates that suppliers like Dell should continue to experience rising infrastructure revenue. Ultimately, the impact of DeepSeek may provide an excellent buying opportunity for investors following Wall Street's overreaction.

AI, Stocks, Nvidia