Why it’s not over for Nvidia or these mega-cap tech stocks
America’s tech titans received a shock on Monday as China’s DeepSeek AI model looked set to turn the AI industry on its head. But investors are being warned not to overreact.
28th January 2025 13:32
by Graeme Evans from interactive investor
Nvidia and Wall Street’s tech growth story today retained support after the battering for valuations caused by a lower-cost threat to America’s AI dominance.
Futures trading pointed to improved sessions both for the Nasdaq 100 index and for the semiconductor giant, which fell 17% on Monday after the rapid advance of China’s DeepSeek AI model disrupted previous assumptions on the investment needed for sustaining the AI revolution.
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NVIDIA Corp (NASDAQ:NVDA) shares rose 239% in 2023 and by another 171% last year, but lost $593 billion (£477 billion) on Monday in what was the biggest single-day slide in stock market history. By the end of the trading session, the company was worth less than $3 trillion.
Source: TradingView. Past performance is not a guide to future performance.
The reverse, which Deutsche Bank noted this morning was equivalent to the entire value of Exxon Mobil Corp (NYSE:XOM) or Mastercard Inc Class A (NYSE:MA), was accompanied by double-digit falls for Broadcom Inc (NASDAQ:AVGO) and ARM Holdings ADR (NASDAQ:ARM) as the Philadelphia Semiconductor index had its worst day since March 2020.
Other so-called Magnificent Seven stocks were more resilient as the AI-linked Alphabet Inc Class A (NASDAQ:GOOGL) fell 4% and Microsoft Corp (NASDAQ:MSFT) by 2%, while Apple Inc (NASDAQ:AAPL) rose 3% to retain the crown as most valuable company on Wall Street at over $3.4 trillion.
UBS said Monday’s sharp reverse reflected concerns about potential AI price wars, the outlook for capital expenditure at major US tech firms, and the challenges of navigating investment across the various layers of the AI ecosystem.
However, it said it was important to keep developments in context, particularly given that both the S&P 500 and the Nasdaq Composite are up both month and year to date.
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The bank added that over the past decade there has been at least one 10% valuation reset in global tech every year. Barring the 30% in 2022, which was driven by rising rates and the Russia-Ukraine war, tech indices have rebounded strongly over the subsequent 12 months.
UBS told clients: “AI is here to stay, and if anything, DeepSeek reinforces that.
“However, the latest developments do also show that investment approaches that are too concentrated or overly passive can be risky, as value can quickly shift within the AI ecosystem. An active and diversified approach is a better way to gain exposure to AI, in our view.”
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Morgan Stanley points out that DeepSeek trends could be a positive for Microsoft and other software firms if model improvements end up bending the GenAI cost curve.
It is thought that DeepSeek’s V-3 model was trained in two months using about 2,000 Nvidia H800 chips, which cost roughly $6 million.
The bank said: “While this is raising questions across the technology landscape as it defies the consensus view that compute scaling is the primary vector of model improvements, we see it as a positive development for the software ecosystem.”
It points out that Microsoft, which is due to post results tomorrow evening, could see potentially higher free cash flow due to reduced capital expenditure needs.
Morgan Stanley, which currently has a price target of $166 for Nvidia shares, also expects that AI infrastructure spending will continue to grow rapidly, reflecting the high percentage of US data centers focused on non-training tasks.
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Even after the release of DeepSeek's model, UBS points out that Meta Platforms Inc Class A (NASDAQ:META) indicated that it plans to spend as much as $65 billion this year to expand its AI infrastructure. This is almost $10 billion above market expectations.
The bank added: “While more details remain to be seen, we believe this suggests capex commitments from leading US tech companies are intact.”
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