Nvidia's stock experienced a tumultuous start to the week, plunging 17% on Monday and erasing more than $595 billion from its valuation, marking the biggest single-day market cap decline on record. This dramatic sell-off occurred after DeepSeek released an open-source AI model, the R1, which reportedly outperforms OpenAI's models in various tests. Built for less than $6 million, DeepSeek's innovation raised concerns about an AI stock bubble, sending shockwaves throughout the tech industry and contributing to a 3% drop in the Nasdaq Composite.
Nvidia praised DeepSeek's R1 model as "an excellent AI advancement." The model's development cost stands in stark contrast to the billions of dollars major U.S. tech companies are currently spending on artificial intelligence. This development has prompted market participants to reassess the implications of such a cost-effective large-language model on the AI trade. Despite the market turmoil, Nvidia shares showed signs of recovery in premarket trading on Tuesday, although the rebound remained uncertain.
"DeepSeek's work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant." – Nvidia spokesperson
The emergence of DeepSeek underscores significant evolutionary innovations in AI, which some analysts suggest could be deflationary. Most Wall Street analysts have maintained their support for Nvidia despite Monday's sell-off, with no downgrades reported. Morgan Stanley's Joseph Moore retained his overweight rating on Nvidia but adjusted his price target from $166 to $152.
"The DeepSeek release highlights evolutionary innovations in AI, some of which may be deflationary. That said, the stock market reaction is probably more important than the cause, and could bring further export controls or reduce spending enthusiasm; trimming PTs but remain positive," – Morgan Stanley's Joseph Moore
Barclays analyst Raimo Lenschow emphasized the need for investors to differentiate between potential benefits and drawbacks posed by DeepSeek's advancements for the software industry. The prospect of more powerful large-language models operating at a fraction of original cost estimates could lead to faster and broader adoption of generative AI across the software universe.
"We think investors need to differentiate between the impacts around potential benefits and drawbacks of DeepSeek for the software industry. More powerful LLM models that can run at a fraction of the original cost estimates (if confirmed) will mean that genAI adoption should come easier … and hence, faster and broader across the software universe," – Barclays analyst Raimo Lenschow
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