The recent stock performance of Nvidia Corp., a bellwether for the AI industry, has deviated from its usual pattern. Following a sharp decline triggered by DeepSeek’s competitive claims, investor hesitation suggests growing concerns about a potential slowdown in AI spending.
Nvidia’s shares plummeted 17% in a single day after the Chinese AI startup, DeepSeek, announced high performance at a lower cost, wiping out approximately $590 billion in market capitalization. Despite a partial recovery, the stock remains over 12% below its January peak. This setback is notable considering the substantial capital expenditures planned by key Nvidia customers, including Amazon, Alphabet, Meta, and Microsoft, totaling $300 billion this year.
Historically, investors have readily bought Nvidia stock on dips. However, this time, the dip-buying behavior was delayed, occurring only after a more than 21% drop from the stock’s peak. This unusual pattern reflects heightened investor caution regarding AI spending, particularly in light of DeepSeek’s assertion of achieving comparable AI model performance with fewer chips.
Gene Munster, managing partner and co-founder of Deepwater Asset Management, observed a shift in investor sentiment. He noted that Nvidia’s narrative transformed from an “impenetrable, bulletproof story” to one vulnerable to rapid change, highlighting the underlying concern about the sustainability of the current AI boom. DeepSeek’s announcement served as a “wake-up call,” suggesting a potential slowdown in AI spending sooner than anticipated.
On Wednesday, Nvidia shares experienced further declines, falling as much as 2.8% in early trading. This negative sentiment creates a challenging backdrop for Nvidia’s upcoming earnings report on February 26th. In contrast to previous quarters, where anticipation was high and the stock traded near record levels, Nvidia now faces the task of reassuring investors who have become more skeptical about the company’s future growth prospects.
Morgan Stanley analysts, led by Joseph Moore, highlighted the significance of the negative stock reaction, emphasizing it as the dominant narrative and a key risk factor. They acknowledged the prevailing cynicism among investors and posed the question of whether revenue acceleration can alleviate these concerns. While they believe it’s possible, they conceded that it remains a subject of debate.
Adding to the challenge, Nvidia’s year-over-year growth comparisons are becoming increasingly difficult due to the exponential expansion in past quarters. While Bloomberg estimates project a 73% revenue growth for the upcoming quarter, this represents a significant slowdown compared to the 94% growth in the previous quarter and the remarkable 265% growth in the same quarter last year.
In conclusion, the DeepSeek-induced stock decline has shaken investor confidence in Nvidia and raised concerns about the trajectory of AI spending. The upcoming earnings report will be crucial for Nvidia to address these concerns and reaffirm its growth story. The company needs to demonstrate continued momentum and provide compelling evidence that the AI boom, and Nvidia’s leading role within it, remains intact.
