Sizing Up a New Opportunity for NVIDIA Investors
NVIDIA (NASDAQ: NVDA) stock plunged more than 10% on news from China AI that rocked the AI world. The launch of DeepSeek raises questions about the cost of computing and NVIDIA’s position in the data center and AI industry, but take it with a grain of salt. DeepSeek’s claim to have cost only $6 million is disputed by experts and unverifiable. There’s no telling how much money went into the project to get it to the point of only costing $6 million, and other factors are in play. DeepSeek’s founder and principal funder, Liang Wenfend, has ties to the Chinese government and reason to skew the data, given the escalating technology war between China and the U.S.
The flip side is that China’s advances in AI technology are offset by the United States' dominant technological position. While the advent of lower-cost models may have a near-term impact on the market, the longer-term outlook is solid. The advancement of AI will be driven across the stack, including chip advancement, and NVIDIA is the critical player. Not only are its chips central to the AI boom, but its CUDA operating platform is also essential. It unlocks and harnesses GPU power for AI development; major updates will be forthcoming.
Blackwell production has ramped up to 100%; there are plans for capacity expansion, including into the U.S., and the next-gen technology will soon be available. Rubin, the next iteration of NVIDIA’s GPU technology explicitly built for AI, is expected in the second half of this year, fully six months ahead of best-case scenarios in late 2024.
Analysts Pan the News: DeepSeek Not a Competitive Threat
The analyst's response is to pan the news. Wedbush analyst Dan Ives says DeepSeek will cause ripples, but neither it nor China can match the United States AI endgame, including the infrastructure and ecosystem to operate. In his view, the price plunge is an opportunity to load up on a bundle of leading AI names, including Microsoft (NASDAQ: MSFT), Palantir (NASDAQ: PLTR), and Salesforce (NYSE: CRM). The most recent Wedbush and rating tracked by MarketBeat is from October 2024, when the price target was lifted to $175. That is above the mid-January consensus figure, which implies more than 30% following the DeepSeek driving sell-off.
The analyst sentiment trends for NVIDIA are bullish. These trends include increased coverage, firming sentiment, and an increasing consensus price target. The consensus forecasts a 30% upside; the revisions trend suggests a move to the high-end range, which adds another 36% to it. The risk in the sentiment is that subsequent earnings reports will fail to impress, and the price targets will start falling.
NVIDIA’s FQ4 2025 results are due in late February, and the bar is set high. Thirty-four of the 85% of analysts tracked by MarketBeat increased their revenue and earnings targets since the last report. They forecast another sequential growth, with YOY growth slowing to 75% and earnings growing slower. The likely reality is that NVIDIA will outperform the consensus as it has for the last two years and drive a wider margin with the leverage.
NVIDIA’s Cash Flow Will Help Sustain Upward Price Momentum Over Time
One of the critical details for NVIDIA investors is the increased leverage and cash flow provided by the booming GPU business. The company’s cash pile was up 50% YTD at the end of Q3, receivables, and inventory were up, total assets were up, and the company was net cash relative to total liability. The long-term debt position is small and manageable, leaving NVIDIA in a solid position to buy back shares, pay its dividend, and increase its capital return steadily over time while reinvesting in AI and maintaining a fortress position.
The price action is iffy following the release. The price plunged more than 10% and showed resistance at a critical level in early trading. That level aligns with the 150-day EMA, a significant level if confirmed as resistance. In that scenario, the stock price could fall to the bottom of a long-term trading range.
