Nvidia shares spooked as China’s DeepSeek raises questions over AI capex

Investing.com– Artificial intelligence darling Nvidia’s shares fell on Friday following the launch of Chinese generative AI program DeepSeek last week, which claimed to be able to outperform rival offerings at a fraction of their cost. 

NVIDIA Corporation (NASDAQ:NVDA) shares fell more than 3% to $142.62 on Friday, although they still ended higher for the week. 

DeepSeek- which is funded by Chinese quant firm High-Flyer- made its R1 LLM open source, and also released a paper outlining how advanced LLMs can be built on much smaller budgets. 

DeepSeek had access to about 50,000 Nvidia H100 AI GPUs- the previous generation of Nvidia’s AI GPUs, which are set to be replaced by the Blackwell series. It was unclear to what extent the company had leveraged this access for its LLM. 

But the biggest point of contention over DeepSeek R1 was that the LLM was able to achieve competitive results despite its rivals, such as OpenAI’s ChatGPT and Meta’s Lama, having access to substantially bigger budgets and more advanced technology. This notion was relevant in the light of recent U.S. export controls on chip technology to China, as well U.S. President Donald Trump announcing $500 billion in private spending to build more U.S. AI infrastructure. 

DeepSeek R1 raised questions about just how justified the billions of capital expenditure, undertaken by Wall Street’s technology giants, was necessary for AI advancements. 

Of the so-called Magnificent 7 stocks, Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Alphabet (NASDAQ:GOOGL) have announced rapidly increasing capital expenditures in recent quarters to further their AI ambitions. Analysts expect this to remain the case when they report their December quarter earnings this week. 

“It might be good news for the Mag-7 that can learn from DeepSeek to design AI systems with cheaper GPUs. That would reduce their capital spending and boost their profits. It might not be a happy development for Nvidia,” Yardeni Research said in a note.

Nvidia has benefited greatly from increased AI investment in the past two years, seeing exponential growth in sales as tech giants sought to bolster their AI development by increasing their data center capabilities. 

But DeepSeek’s success raises questions over whether AI developers can achieve progress by building leaner, more efficient models that don’t require as much investment in chip technology. 

JPMorgan’s Joshua Meyers said concerns over higher AI budgets were “overdone,” while noting that DeepSeek’s efficiency may have been out of necessity, given that Chinese firms are blocked from access to advanced U.S. chip technology. 

“If DeepSeek can reduce the cost of inference, then others will have to as well, and demand will hopefully more than make up for that over time,” Meyers wrote in a short note dated to Saturday.