Nvidia’s shares are down again

Seismic gains in Nvidia’s share price over the past two years have propelled it from mid-cap mundanity to one of the most valuable companies in the world, becoming a stock market sensation along the way.

Nvidia’s stock is up around 444% in the two years to 28 February, but the share price has fallen 9.7% in the year to date. Why are investors selling off the stock when Nvidia had previously seemed to have unstoppable momentum?

Nvidia (NASDAQ:NVDA) was the top stock bought on Interactive Investor’s platform in January, despite falling around 13% during the month. Artificial intelligence (AI) start-up DeepSeek’s sudden appearance threatened to shake up the dominant position that Nvidia and the other Magnificent Seven stocks had established for themselves.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

“Once the world’s most valuable company with a $3.5 trillion market cap, Nvidia recently lost nearly $600 billion in market value and fell to third place following the emergence of China’s DeepSeek,” said Sam North, market analyst at eToro.

That slump in the value of Nvidia’s shares was the largest single-day loss for any company in stock market history.

Nvidia wasn’t the only company impacted – DeepSeek’s shadow has been ever-present throughout the big tech earnings season this year – but Nvidia’s shares clearly bore the brunt of the impact.

Nvidia bulls had hoped its earnings report on 26 February might reverse the trend, but despite gaining in after-hours trading immediately after the release, Nvidia’s shares dropped 8.5% the following session.

The reasons for the sell-off in Nvidia’s shares are complex, but ultimately boil down to its underwhelming forward guidance failing to reassure investors about the threat DeepSeek implies to its long-term business model.

What did DeepSeek do to Nvidia’s shares?

Nvidia’s share price slump had one clear catalyst: DeepSeek.

This AI start-up from China became the highest-rated free application on the US App Store in January, sending shockwaves through the stock market given its significantly lower reported training costs, compared to US alternatives like ChatGPT.

Nvidia’s shares were particularly heavily impacted because its high-performance graphics processing units (GPUs), which had been viewed as critical for the development of high-performance AI models, weren’t used to build DeepSeek.

Instead, the app was built using less advanced Nvidia H800 chips – which were specifically developed to circumvent US export controls on the highest-performing chips.

This presented a problem for Nvidia, because its enormous valuation has been built on the expectation of exponential future growth. This expectation was founded on the assumption that only its chips could power the most advanced AI models, creating almost unlimited demand and giving Nvidia near-total pricing control.

As eToro’s North puts it, DeepSeek’s success “highlights that expensive cutting-edge chips may not be essential for AI breakthroughs”.

On that basis, you can’t blame shareholders for thinking it wasn’t worth the 50-times trailing earnings that it had been trading at. Cue the big sell-off.

Was it a little overblown, though? It’s tempting to buy into the narrative that says the investment thesis for Nvidia’s shares has been blown apart by DeepSeek.

“The emergence of DeepSeek prompted a 17% one-day drop in Nvidia stock on the mistaken belief that the latest chips were no longer needed for AI,” writes Adrian Cox, research analyst at Deutsche Bank, in a thematic research note seen by MoneyWeek.

Cox was writing about a specific release that approximately coincided with DeepSeek: that of deep research, which OpenAI, the developer of ChatGPT, launched on 2 February.

“Deep research shows that you can never have too much computing power,” Cox writes. He highlights a bifurcation of AI tools into small models like DeepSeek, which can run well on a phone, and the other end of the spectrum: high-powered, cloud-hosted deep research models, like OpenAI’s, “where there is no let-up in the arms race for more and more compute”.

Nothing about DeepSeek’s appearance to date suggests this market will be disrupted.

Even at the less technical end of this spectrum, there is still good news for Nvidia.

“There’s an argument that even if the cost of compute comes down rapidly, it just means more companies will have access and the ability to create AI products and the overall aggregate demand for Nvidia’s product can actually still grow in that environment,” Matt Britzman, senior equity analyst at Hargreaves Lansdown, tells MoneyWeek.

In economics, this is known as the Jevons paradox.

Why did Nvidia’s share price fall after earnings?

All of that said, markets were nervous ahead of Nvidia’s earnings release.

Investors were hoping the company, which has developed a track record of blowing past analyst expectations over recent years, could once again wow the world with huge results and, more importantly, forward guidance that showed it could weather the DeepSeek storm.

It delivered on the first point. Quarterly revenue of $39.3 billion and earnings per share of $0.89 both beat analysts’ estimates (of $38.08 billion and $0.85, respectively).

Initially, markets bought into the positivity. Nvidia’s share price gained 2.1% in after-hours trading, as CEO Jesen Huang brushed off the implications of DeepSeek for AI demand.

“It’s an excellent innovation,” said Huang, but he highlighted the fact it relies on “a world-class reasoning AI model” that inevitably consumes massive amounts of compute power.

The next day, though, the mood changed.

The negative elements of Nvidia’s earnings release – in particular, fairly underwhelming forward guidance that implies a substantial slowdown in the rate of Nvidia’s revenue growth – coincided with tariff updates from US president Donald Trump that sparked a sell-off in risk assets.

Nvidia’s shares – priced as they were for perfection – were hard hit, and the stock fell 8.5%.

Are Nvidia’s shares good value?

The hefty valuation of Nvidia’s shares has given plenty of investors pause for thought over the last two years, but it has, in fairness, come down substantially from the 100-times trailing earnings that the stock has reached during its run.

Following its recent downturn, Nvidia stock now trades at 42.49 times trailing earnings and 27.80 times projected earnings, according to data from stockanalysis.com (as of US market close on 28 February).

However, as always when considering buying shares, it is important that investors conduct their own thorough research and consider the downside risks.