On Tues 28 January 2025 (AEDT) tech giant Nvidia’s shares plunged 17 per cent – its worst day on the market since March 2020 (which was early in the Covid-19 pandemic). To put that drop in Aussie dollars, that comes to a loss in value of almost $1 trillion. ($AU948 billion, or $US593 billion.) So why did Nvidia shares fall?
AI and GPUs
Nvidia’s core business as a tech company is making chips, systems and software that power artificial intelligence (AI), gaming and graphics applications.
A key factor in Nvidia’s success as a leading global company was its development of high-level graphic processing units, or GPUs.
GPUs enable AI models to process the enormous amounts of data they require to carry out their complex calculations. In fact, they’re fundamental. They can carry out a large number of tasks simultaneously to enable fast processing speeds.
Hardware like smart phones, gaming devices and laptops use less powerful GPUs, but more complex AI models use high-end GPUs that can fetch tens of thousands of dollars.
In short, GPUs are hot property.
Enter DeepSeek
DeepSeek is a Chinese artificial intelligence software company (Hangzhou DeepSeek Artificial Intelligence Co. Ltd.) which released its own free AI-powered chatbot that works in a similar way to ChatGPT.
The AI start-up has made waves after surging to the top of app download charts and creating downward pressure on US tech stocks.
DeepSeek claims its AI technology can do similar processing to models like ChatGPT while using less power and at a reduced cost.
While some commentators (such as Elon Musk) are disputing these claims, it’s still made people think twice about Nvidia’s future value.
When a company claims they’ve made a product that can achieve similar processing for less money, that’s big news for investors.
The value of a company is largely dependent on its expected future earnings. When news arrived that a Nvidia rival could produce a similar item at a much lower cost, investors quickly lowered their expectations of future earnings. The result: the value of shares in the company decreased.
Concerns are growing that Nvidia’s lucrative AI chip may soon not be in such high demand.
If DeepSeek’s AI model is as efficient as it claims, then AI systems could be set to develop not only at a faster rate but also challenge the big US companies, which analysts estimate are spending around $US250 billion a year on AI.
So where does this leave investors holding Nvidia shares? Well, for a company to lose nearly $US600 billion in market value in one day is nothing to be sneezed at. But to put this in perspective, the share price has doubled over the past 12 months, so it’s still delivered an amazing 1 year return for investors.
Either way, given the vast number of companies – and investors – that AI technology looks set to affect, DeepSeek may well warrant deeper thought.
If you help with your investments, Align Financial is here to help. Call us on (02) 9913 9995.
