Is DeepSeek Challenging NVIDIA’s AI Dominance?
When market volatility compresses, as it did over the past five days, seasoned investors and traders should consider what could happen next to bring about a spike in volatility, such as unusual trading volume or options trading activity. This week’s volatile event, coming in to end the first month of 2025, comes all the way across the world from Asia’s powerhouse.
In China, a group of developers has released their own version of an artificial intelligence-driven chat system, such as OpenAI’s ChatGPT. This new system, called DeepSeek, apparently has over twice the computing power at a fraction of the cost, which deeply challenges the current state of semiconductor supply and demand in today’s market.
The market is reacting to the news by selling off one of the most overextended names in the technology sector today.
Shares of NVIDIA Co. (NASDAQ: NVDA) are down over 10% to start the new trading week, bringing other stocks and indexes down with it as it became the biggest holding in some portfolios across the board.
Investors will understand why this is happening and how the whole situation likely ends from here, with risks put aside and opportunities kept in focus.
Is DeepSeek Truly Better?
The simple answer to this question is a resounding yes, as long as investors trust the information and statistics coming out of China. Another gauge, probably more foolproof, can be taken from actually trying out the product. Now that DeepSeek has become the most downloaded application in the world, chances are these claims aren’t false.
With this in mind, there is a significant conflict in the industry as a whole: whether more can be done with less. This is the proposition coming out of China, which is why the market’s price action rewards some of the technology names in that nation while punishing United States technology stocks.
For example, the KraneShares CSI China Internet ETF (NYSEARCA: KWEB) is rallying by over 1% while the Nasdaq-100 is down over 1% on the other hand; another clear example is Alibaba Group (NYSE: BABA) rallying by over 2.2% in a single day despite this bearish view for technology stocks overall.
This price action might mean that the estimates for costs and capital intensity might have gotten away from these giant names. Looking at the recent producer price index (PPI) and manufacturing PMI reports, investors would realize that demand for semiconductors and chips had taken a backseat.
However, NVIDIA and other leading names kept producing inventory as if the demand cycle was still at the upper end of the range. As the laws of economics go, oversupply will lead to a needed adjustment. This is why DeepSeek might have chosen to launch now and not earlier, knowing that the data would favor them.
Is There a Way Out?
For those looking to play their hand in this situation, the best thing to do would be to keep portfolios away from all this volatility and focus more on great risk-to-reward setups. One stock in the United States that could fit this criteria is Advanced Micro Devices Inc. (NASDAQ: AMD), as a few factors would favor it over NVIDIA today.
First, Wall Street analyst price targets would favor Advanced Micro Devices. The consensus is set for $176.3 a share, which calls for up to 50% upside from today’s price. Compared to NVIDIA, its price target of $164.6 a share calls for a much lower 29.8% upside from today’s levels alone.
More than that, some analysts might adjust their valuations on NVIDIA after this bold DeepSeek achievement and claim. Secondly, the fact that NVIDIA stock is selling off by over 10% while Advanced Micro Devices managed to contain its drawdown within 4% should tell investors all they need to know.
This is where the risk-to-reward setup becomes important between these two names, as Advanced Micro Devices trades as low as 54% of its 52-week high, while NVIDIA stock is at a much higher 83% of its 52-week high. This way, investors could buy the semiconductor dip through the best setups today.
But, for those who believe that DeepSeek can pull this all off, considering a Chinese technology name like Alibaba and its 62.3% implied upside coming from Macquarie analysts and their $145 a share price target would be a great choice.
Especially as DeepSeek will rely on cloud computing services, such as the ones Alibaba is looking to expand on in the coming months. All told, the answer remains the same: so far, the evidence does stack up in favor of DeepSeek’s claims and against the stratospheric valuation multiples that NVIDIA had called for.
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