Technology

DeepSeek crash creates rare buy the dip opportunity for Nvidia, Magnificent 7

Tue 28 Jan 25, 1:27pm (AEDT)
AI and Nvidia 1200 x 630
Source: Market Index, Shutterstock

Key Points

  • DeepSeek is a private Chinese company that has recently released a new free, open source AI model that is growing in popularity
  • DeepSeek’s developers claims its uses less processing power than existing AI applications, and it was developed at a fraction of the cost
  • Investors sold off major US tech stocks overnight, fearing that the disruption DeepSeek will cause will have a major negative impact on tech sector earnings

DeepSeek has sent shockwaves through both the tech world and financial markets (is there much of a difference these days?) with the launch of its new AI advanced reasoning model last week. Yes, last week.

So why all the fuss suddenly, and why did US tech stocks as measured by the NASDAQ Composite plunge over 3% Monday? Yes, markets were aware of DeepSeek’s new AI model for over a week, but the big stir occurred over the weekend when the company’s iOS app took No 1 spot on the App Store in the US, UK, China, and here in Australia (among other countries).

That caught the market’s attention: Is DeepSeek about to disrupt the entire AI industry? It’s an industry that has stacked on trillions of dollars in market capitalisation over the past 18 months as AI mania gripped markets and sent the share prices of the likes of chip maker Nvidia (NVDA), and application developers Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), and Tesla (TSLA) through the roof.

The so-called Magnificent 7, or Mag 7, if you prefer.

If you don’t own them directly, there’s a good chance your super fund does via its overseas investments. They’re too big for any fund manager to ignore. So, there’s a very good chance you do have some skin in the game – and to some extent – lost some wealth during yesterday’s selloff

That’s the bad news. Here’s the good news, or at the very least, a possible silver lining. In a research report released this morning, Wedbush Securities proposes that Monday’s rout of Mag 7 stocks presents investors with a massive buy the dip opportunity. Let’s investigate why.

What happened at a glance

  • DeepSeek is a Chinese owned company founded in 2023 by Liang WenFeng, a Chinese hedge fund manager with an estimated $8 billion under management

  • In late December, the company introduced a free, open-source large language model (LLM) that claims to rival OpenAI’s ChatGPT, Alphabet’s PaLM, Meta’s Llama 3.1, and several others (to name a few).

  • DeepSeek’s LLM stands out for its ability to run on reduced-capability chips (possibly due to the US chip export rules aimed at limiting China’s access to cutting-edge semiconductor technology) – potentially reducing the market for Nvidia’s most advanced (and most expensive) chips that companies had been scooping up to run their AI applications.

  • On Jan 20, DeepSeek released an updated version of its LLM, which quickly climbed to the top spot on Apple’s App Store by the weekend.

  • Markets fear China’s AI ambitions might be more advanced than previously believed, potentially threatening US tech dominance…add in the potential Nvidia revenue hit, and US tech stocks came under hefty selling pressure on Monday

NVIDIA 5 years stock price performance chart, Source TradingView
NVIDIA 5 years stock price performance chart - NVIDIA stock fell 16.8% on Monday. Source: TradingView (click here for full size image)

AI industry fallout: Wedbush’s perspective

1. Did they really?

First up, Wedbush casts doubt on DeepSeek’s ability to do what it does as well as it does using lower-spec chips. “It remains to be seen if DeepSeek found a way to work around chip restrictions rules and what chips they ultimately used as there will be many skeptics around this issue given the information is coming from China”, the broker said.

2. The AI revolution is bigger than DeepSeek

There is a bigger issue at play, though, acknowledges Wedbush, who postulates the underlying reason for the broader AI sell off on Monday (rather than in just Nvidia) is due to the perception DeepSeek is potentially a major threat to US tech dominance and the notion it owns the AI revolution.

DeepSeek’s consumer-focused LLM, in Wedbush’s view, is a far cry from a comprehensive AI infrastructure that can challenge the largest US tech ecosystems. While DeepSeek’s rapid development and open-source approach have raised eyebrows, Wedbush Securities argues the broader AI market remains firmly underpinned by the US tech giants.

This is because the real AI revolution centres on massive capital expenditures directed toward autonomous driving, robotics, advanced cloud services, and broader enterprise use cases, contends Wedbush, who believes these are areas in which US companies have a commanding lead and are unlikely to be displaced anytime soon – particularly in the enterprise domain (i.e., software and applications designed to service an entire organisation).

With respect to Nvidia, the broker believes the company’s technology remains indispensable for the next frontier of AI.

3. The industry just won’t trust China

Wedbush dismisses the idea that DeepSeek could become the go-to provider for critical enterprise-based AI solutions among major US corporations. Regulatory concerns, data privacy issues, and geopolitical considerations all but preclude a Chinese start-up from gaining the trust of the US’s and the world’s largest corporations for mission-critical AI deployments.

No US Global 2000 is going to use a Chinese start-up DeepSeek to launch their I infrastructure and use cases. At the end of the day there is only one chip company in the world launching autonomous, robotics, and broader AI use cases and that is Nvidia.

—Wedbush Securities

A golden buying opportunity?

Wedbush points out that similar “shock events” have rattled tech markets before – from rumours of production delays at Nvidia to macroeconomic uncertainties – and each time, the sector has bounced back quickly. DeepSeek’s big splash is therefore simply another instance where bearish sentiment dominates the short term headlines and misses the longer-term structural trends continuing to favour a US-based AI revolution.

Amid the turmoil, Wedbush is unequivocal: this is a buying opportunity for investors in US technology stocks.

A handful of times over the last few years there have been major tech sell-offs that were golden buying opportunities....today is another one of them in our view...and not the time to panic

—Wedbush Securities

The broker singles out the following key US AI players it thinks deserves special attention from investors after Monday’s stock price rout: Nvidia, Microsoft, Alphabet, Palantir (PLTR), Salesforce (CRM), and Amazon. According to Wedbush, these companies are well-positioned to capture the lion’s share of the estimated $2 trillion in global AI spending over the next three years.

Conclusion

In essence, Wedbush believes that while DeepSeek’s accomplishment is impressive – it does not pose an existential threat to American tech leadership. Instead, heightened awareness of DeepSeek’s advances, and more generally AI’s potential, might accelerate capital expenditures for US hyperscalers, thus expanding opportunities for established players rather than shrinking them.

In Wedbush’s view, this latest tech sell-off is just another instance of market overreaction, presenting a golden buying opportunity for those who remain convinced of the long-term US-led AI revolution, emphasising the US AI ecosystem remains far ahead in the race toward “true” artificial general intelligence (AGI).

Written By

Carl Capolingua

Content Editor

Carl has over 30-year's investing experience, helping investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.

Get the latest news and insights direct to your inbox

Subscribe free