This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The emergence of a small Chinese artificial intelligence (AI) company called DeepSeek initially put a giant hole in the U.S. stock market. Tech stocks -- particularly those connected to the AI trend -- got crushed, and GPU king Nvidia (NASDAQ: NVDA) lost roughly $600 billion of its market cap in a single day as investors grew concerned about the company's moat, and whether AI software could be trained and powered at lower costs with less powerful chips.
Now the big question that analysts and investors are grappling with is how serious a threat DeepSeek actually is to the AI sector's status quo. Some think that the company may have invested more money and used higher-quality chips to develop the DeepSeek R1 large language model than it's letting on, while others think its claims are legitimate. Some also think DeepSeek's innovations could prove a net positive for other AI companies long term. After the recent sell-off, would investors be better served to buy the dip on Nvidia or Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG)?
DeepSeek's arrival is hurting Nvidia now, but could help it long term
The big reason Nvidia got hit so hard by DeepSeek is that the Chinese company allegedly managed to create a chatbot with capabilities rivaling ChatGPT, but at a fraction of the cost. DeepSeek says it trained its model for just $5.6 million and used older Nvidia chips to do it. Meanwhile, OpenAI has spent more than $100 million to train certain ChatGPT models.
Nvidia issued a statement on January 27 that seemingly praised DeepSeek and said that the chips used to build its model were "fully export control compliant." The chipmaker also said DeepSeek shows why its chips are needed and that they will be needed in the future. One group of analysts seemed to concur. Cantor analyst C.J. Muse called the sell-off a complete overreaction:
We think this view is farthest from the truth and that the announcement is actually very bullish with AGI (artificial general intelligence) seemingly closer to reality and Jevons Paradox (what happens when improved efficiency actually boosts demand, causing resources to be used up more quickly overall) almost certainly leading to the AI industry wanting more compute, not less.
Muse also noted that there are some doubts about what chips DeepSeek actually used, but he ultimately believes the innovation is bringing the world closer to an artificial general intelligence and will ultimately lead to more widespread use of AI. However, there is also a camp that is concerned DeepSeek is starting to shrink Nvidia's incredible moat, which has supported its 75% operating profit margins.
Analysts at BMO said while there are still a lot of questions, the current information available suggests that DeepSeek likely used servers with 50% to 75% less power intensity than servers that use Nvidia's most recent GPUs. No analysts have outright said they were putting a sell rating on Nvidia stock yet, but the backdrop remains uncertain.
Alphabet: Facing similar threats but in a different place
Alphabet faces a similar threat from DeepSeek. However, its stock didn't sell off as hard, largely because it's in a different place than Nvidia. For one thing, its stock didn't perform nearly as well in 2024.
Alphabet has been dealing with its own issues, notably including a Department of Justice lawsuit that accused the company of using monopolistic practices to dominate the digital ad space and employing pricing methods that essentially made it the only shop in town. A federal judge agreed with Justice. The department then submitted a filing that some view as asking the judge to force Alphabet to break itself up and sell its Chrome browser. While many suspect a breakup plan won't actually come to fruition, it would adversely impact the company if it did.
Additionally, while investors have priced more and more potential into Nvidia's stock, Alphabet's stock price may not fully reflect its AI strengths and opportunities. The company actually builds AI data center chips of its own, for example, and its DeepMind unit is similar to OpenAI. Yet according to D.A. Davidson analyst Gil Luria, these divisions -- potentially worth multiple hundreds of billions of dollars -- are not adequately priced into the stock. Luria still has a hold rating on Alphabet, but would become more optimistic about it if management makes more of an effort to unlock value.
Which should you buy?
As things stand, I don't foresee impending doom for Nvidia. I think the magnitude of the DeepSeek-driven sell-off also had to do with the fact that Nvidia had been trading at an elevated valuation, making it more vulnerable to a correction. Even after the sell-off, the stock still trades at about 41 times forward earnings, which may end up looking like a discount someday. For now, though, I'd recommend buying Alphabet over the AI chip king. Alphabet is still dealing with the overhang of the Justice Department lawsuit, but I don't expect it to have to sell its Chrome browser. Furthermore, the stock only trades at about 22 times forward earnings, and that price may not be giving the company any credit for its AI businesses.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
