Is Nvidia Losing Its Edge?

Last year, Nvidia was among the hottest stocks on Wall Street. This semiconductor giant had established itself as a leader in video game graphics and expanded its reach to dominate the ultra-high-end AI processor market. In June 2024, Nvidia even briefly became the world’s most valuable company, riding a wave of excitement over AI technology.

Major companies across the globe announced substantial investments in AI data centers and processing capabilities, creating a favorable environment for Nvidia. This success increased its importance in major stock indexes and attracted significant investments from both retail investors and large funds.

However, everything changed in January when a relatively unknown Chinese AI company named DeepSeek introduced a conversational AI model. This model claimed to match the reasoning abilities of more prominent American models at a much lower cost, which led to a dramatic drop in Nvidia’s market capitalization by $938 billion in just one day. A brief recovery occurred in February, but the stock faced further declines.

Recently, Jensen Huang, Nvidia's CEO, presented a vision for a strong revival during the company’s annual GPU Technology Conference (GTC) and in several investor interviews. While Nvidia is still generating significant profits—over $3500 per second stemming from its AI and networking tech sales—the growth rate of these profits is what's causing concern among analysts.

One of the key issues is whether or not companies will continue to invest in AI hardware. Additionally, the competition from DeepSeek raises questions about the future pricing and performance of AI services. The ongoing trade tensions and tariffs imposed by the US government also present challenges for manufacturing and shipping.

Huang addressed these concerns at GTC. He argued that AI is becoming essential across all industries and that despite economic uncertainties, companies would continue to invest in AI, seeing it as a key area for growth. He reassured investors that none of the major tech companies have succeeded in producing competing chips to match Nvidia's latest generation, the Hopper designs. Furthermore, he noted that orders for the new Blackwell generation were exceeding those of Hopper at the same stage in their life cycle.

Regarding DeepSeek, Huang acknowledged the capabilities of its R1 model but suggested that its significance was misinterpreted. He explained that the new model will require more computing power, leading to increased demand for Nvidia chips, not less.

The new Blackwell Ultra units, which consist of numerous CPUs and GPUs, will be capable of delivering significant computing power. Huang expressed that the demand for AI computing power is growing at a faster rate than analysts had predicted, emphasizing the ongoing investments in data centers.

Concerning tariffs, Huang indicated that their impact would be minimal and short-lived, citing Nvidia's plans to shift critical manufacturing to the US. Some analysts believe that these tariffs could ultimately become a competitive advantage for Nvidia. Richard Clode, a portfolio manager at Janus Henderson, pointed out that US export restrictions currently limit Chinese AI model capabilities, while globally, AI models are advancing rapidly.

Despite Huang's optimism, there is a noticeable difference in how investors are receiving Nvidia's announcements this year compared to the previous two years, when the excitement around AI applications was at an all-time high. A mention of Dell at this year’s GTC barely moved the market, unlike last year when such news would have led to significant increases in stock value.

In summary, Nvidia’s chips continue to be seen as essential for the tech ecosystem. As analysts suggest, every dollar spent on an Nvidia chip allows businesses across the tech landscape to benefit, creating an estimated multiplier effect worth $8 to $10.

Nvidia's shares are currently down over 10% from their January peak, erasing more than $1 trillion in market value. The core question remains: was the previous AI hype unsustainable, or can Nvidia rebound as concerns over competition and trade disputes lessen?

The market sentiment appears skeptical about Nvidia's stock, following high expectations for growth. However, the demand for Blackwell and upcoming chips remains strong, with no significant competition imminent. The company plans to launch a new Blackwell Ultra chip this year and a new architecture called Rubin next year, promising impressive performance improvements.

In essence, Nvidia still holds a critical position in the evolving tech landscape, but it needs broader industry support to maintain its growth trajectory. Investors will be watching closely as Nvidia navigates these challenges and opportunities.

Nvidia, AI, Competition