5 reasons to like Nvidia

A small Chinese technology company called DeepSeek gave investors a panic attack by releasing an artificial intelligence model that performs powerful calculations at a bargain-basement price.

 When the news broke at the end of January it shaved $US 600 billion from the market value of chip designer Nvidia Inc. (NDQ:NVDA), a decline of 17% on the day. Other tech giants including Microsoft (NDQ:MSFT) followed suit, falling more modestly.

Why the panic? The development was seen as an end to Nvidia’s near monopoly on expensive processors used in artificial intelligence modeling. DeepSeek uses an older, slower Nvidia chip  which was designed for the Chinese market to  comply with US export controls. 

Its solution isn’t as powerful as higher end chips but seems good enough for many tasks at one-tenth the price. How much it can do is still to be tested, but its arrival undoubtably changes the game.

DeepSeek’s achievement was made known before Christmas but was largely ignored. When investors started paying attention in the New Year sentiment changed as the implications sank in.

The big one is that the billions spent by big tech on cloud computing, much of which buys Nvidia’s chips, is wasted because the companies will not be able to recoup their investment.  That led to the sell off.

Since then, Nvidia’s shares recovered all the ground lost and lost it again. the time of writing, the shares were trading at $115.78 slightly below their opening price on Jan. 27.

  CEO Jensen Huang and Microsoft CEO Satya Nadella have both cheered DeepSeek’s arrival, emphasizing that lowering costs for the development of AI applications expands the overall market. That’s good for everyone. Nadella confirmed Microsoft’s 2025 R&D spending will remain at $29 billion with a large chunk going to Nvidia’s chips. It writes software to harness their power and uses that to crunch data on its cloud platform. 

Amazon CEO Andy Jassy says its capital spending in 2025 may exceed $100 billion. Meta’s CEO Mark Zuckerberg said they plan to spend up to $65 billion on AI technology in 2025.

Their optimism has plenty of historical precedent. Netflix (NDQ: NFLX) was founded in 1997, but took off 20 years later, when it popularized streaming services. Its insatiable demand for content has expanded the entertainment industry and influenced how films and TV are produced and consumed. Netflix had a head start, but now competes with Hulu, Amazon Prime, Disney+, Paramount + and Apple TV. All this competition has only made the shares more valuable. Netflix stock traded at US $3.80 in 2007 are now at $931 – a 24,400% increase.

In 1981, IBM (NYSE:IBM) introduced its first personal computer which became a benchmark for what followed. Intense competition with Apple, and Microsoft led to innovation. PC prices dropped, they became more affordable, more were sold and the market grew. 

With that in mind, here are five reasons why Nvidia remains attractive even as competition heats up:

Technology lead: Competition was bound to arrive, but Nvidia’s investment in R&D gives it a pipeline of new products. That created its newest chip called Blackwell which is two and a half times faster than its predecessor and uses less energy. More will follow. 

Continuous innovation: Nvidia made its name with the graphic processor units (GPUs) used in gaming systems such as Microsoft’s Xbox.  That led to other products. Now, the applications for its chips are everywhere, including autonomous factory robots, self-driving cars, drones, medical imaging and processing large amounts of data to speed up drug development.

Strategic Partnerships: Nvidia’s best customers are also its partners.  It collaborates with Microsoft on AI and cloud computing and various projects that enhance Microsoft’s XBox. It works with Lenovo (which acquired IBM’s hardware business in 2004) to build workstations and gaming laptops. Mercedes-Benz and Audi are partners working to develop the electronics that control cars. This includes safety systems that detect obstacles, lane departure warnings and adjustments to cruise control to maintain a safe distance from the car in front.

Customer Loyalty: The above keeps Nvidia close to its customers and vice versa. It creates informal relationships which makes it harder for them to go elsewhere. Price would be one reason, but not the only one. A big risk is going elsewhere and getting it wrong.

 Market Expansion: Because DeepSeek’s H800 chip has less computing power, it performs well on some tasks and not on others. You can buy a superior laptop like Apple’s MacBook Pro or a budget-friendly option like Acer. Both are computers but with different capabilities.

DeepSeek and the others that will follow signal the arrival of  choice which will expand the market. That’s good for everyone, including Nvidia.