Mondays are tough, but this one was especially so for investors. Pre-market trading saw significant declines in the so-called “Magnificent Seven,” with Nvidia — one of the key drivers of the recent bull market — leading the losses. The culprit? Fears of lower demand for Nvidia's products.
No, it's not because Trump is shelving the $500 billion Stargate project to invest in AI over the next few years. Instead, the sell-off was driven by news that a Chinese startup, DeepSeek, developed an OpenAI competitor at a fraction of the cost — allegedly less than $6 million — using significantly fewer chips.
If the Chinese can build something comparable to U.S. tech giants for a fraction of the cost, could the massive demand for Nvidia chips not materialize as expected? These concerns hit Nvidia stock hard, dragging down the broader market, as Nvidia has been a key driver of recent growth.
However, the $5.6 million figure proudly shared by DeepSeek may exclude other significant costs. In addition, several industry sources suggest that development costs were much higher and likely related to Nvidia's high-end (H100) GPUs, which are theoretically restricted by current export controls.
So perhaps it is premature to claim that China has overtaken the U.S. in AI development with such a dramatic cost advantage. Either companies like Meta and Microsoft are wildly inefficient, or there are some gaps in the story, and the latter seems most likely. The truth will come out in time.
Tough times ahead for Nvidia?
Nvidia has posted stellar results in recent quarters. In November, for example, it presented revenue of $35.08 billion (+94%), operating income of $21.87 billion (+110%), and net income of $19.31 billion (+109%), with EPS soaring 111% to $0.78 as demand for its products has outstripped supply.
For its February earnings report, Nvidia is expected to post EPS of $0.84, up 61.54% year over year. Revenue is expected to reach $37.72 billion, reflecting 70.68% growth compared to the year-ago quarter. Investors are, therefore, expecting another strong quarter.
Now, if AI development turns out to be significantly cheaper than expected, companies like Amazon, Microsoft, and Google may need to invest less in infrastructure. This could boost their results in the future (once they figure out how to monetize AI), but it would likely hurt Nvidia's growth prospects.
The latter is because lower development costs could lead to faster innovation and broader adoption, ultimately increasing the demand for chips. If the cost of developing AI drops significantly, AI should theoretically spread more quickly, boosting demand for semiconductors.
This article was written by FL Contributors at www.forexlive.com. Read More Details
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