DeepSeek's "Low Computing Power Cost Storm" Shocks US Stocks, Is NVIDIA's AI Chip Myth Finally Shattered?

In the past few years, due to the ongoing AI boom, whenever NVIDIA (NVDA.US) stock price adjusted, investors would rush to buy on dips. However, since the emergence of the Chinese AI startup DeepSeek triggered significant turmoil in the US stock market, market sentiment has changed dramatically, indicating that investors' concerns about a slowdown in AI spending have not dissipated.

After DeepSeek claimed to achieve high performance at a lower cost, NVIDIA's stock price plummeted 17% in one day, with a market value evaporating by about $590 billion. Although the stock price has since rebounded, it is still more than 11% lower than the historical high in January. This decline coincided with key clients like Amazon (AMZN.US), Google (GOOGL.US), Meta Platforms (META.US), and Microsoft (MSFT.US) planning to invest a total of $300 billion in capital expenditures this year.

This time, investors only began to buy the dip after NVIDIA's stock price fell more than 21% from its peak, a phenomenon that has occurred only a few times in recent years. This indicates that investors' cautious sentiment regarding AI spending is intensifying—especially since DeepSeek claims to use fewer chips for its AI models.

Gene Munster, managing partner and co-founder of Deepwater Asset Management, stated: "There is a latent concern in the market about when this feast will end. I think DeepSeek has sounded the alarm, indicating that this moment may come sooner than people expect. Market psychology shifted in a day, from an almost unassailable, flawless story to one that could change dramatically."

This negative sentiment has created a starkly different atmosphere for NVIDIA's earnings report, which is set to be released on February 26. Over the past two years, almost every quarterly report has been met with positive expectations, with stock prices at or near historical highs before the earnings release. This time, NVIDIA needs to convince investors who may have begun to doubt how much higher the stock price can go.

Analysts at Morgan Stanley, led by Joseph Moore, wrote in a report last week: "The negative reaction of the stock price has become the focus and largely constitutes the biggest risk currently." As investor sentiment deteriorates, "skepticism is unstoppable. Whether accelerated revenue growth can alleviate these concerns remains to be seen; we believe it can, but it is still debatable."

As investor confidence wavers, NVIDIA is facing the high base brought about by exponential growth in the past few quarters, making it difficult to surpass year-on-year growth rates. According to analysts' expectations, NVIDIA is expected to report a 73% revenue growth, down from 94% in the previous quarter and far below the 265% increase from the same period last year.

Of course, some believe that the negative sentiment surrounding NVIDIA's stock price presents a buying opportunity. Analysts at Evercore ISI, led by Mark Lipacis, issued a tactical "outperform" rating ahead of the earnings report, stating that the sell-off triggered by DeepSeek created an opportunity Moreover, with about two weeks until the earnings report is released, it is certainly possible for the stock price to recover lost ground.

This sell-off may also make NVIDIA's valuation more attractive to some investors. The stock currently has a forward price-to-earnings ratio of about 30 times, while its five-year average price-to-earnings ratio exceeds 40 times.

Nevertheless, as bottom-fishing buyers have not entered the market in large numbers, NVIDIA's stock price appears precarious ahead of the earnings report—especially if the performance fails to exceed the increasingly high expectations set by investors.

Ivana Delevska, Chief Investment Officer of SPEAR Invest, stated that if NVIDIA disappoints, the stock price may fluctuate within a range until the second half of the year, adding that concerns surrounding NVIDIA's Blackwell chip have also put pressure on investors.

The rollout of the highly anticipated new product line has slowed due to manufacturing challenges and supply constraints. Although NVIDIA has stated that Blackwell will drive growth under strong demand, concerns about costs remain.

Delevska said, "People have been a bit nervous about Blackwell from the start. Management has consistently stated that everything is on track and going well, but for some reason, people do not believe that. This may be why you haven't seen a rebound in the stock price ahead of the earnings report."