In September 2024 I reported that NVIDIA experienced the biggest daily drop in market cap in US history.
Yesterday that record was beaten by a factor of 2x by .... NVIDIA (again?!?!).
On January 27, 2025, Chinese startup DeepSeek's launch of a low-cost AI model triggered a massive selloff in tech stocks, particularly affecting Nvidia and other AI-related companies. The key impacts were:
Financial Impact:
- Nvidia lost $593 billion in market value in a single day, falling nearly 17% - the largest one-day market cap loss ever recorded on Wall Street
- The tech-heavy Nasdaq fell 3.1%
- Major tech companies were affected: Broadcom (-17.4%), Microsoft (-2.1%), Alphabet (-4.2%)
- The Philadelphia semiconductor index dropped 9.2%, its biggest decline since March 2020
Why DeepSeek Matters:
- The company launched a free AI assistant that uses less data and costs significantly less to operate than competitors
- DeepSeek-R1 is reportedly 20-50 times cheaper to use than OpenAI's model
- The model was trained using Nvidia's lower-capability H800 chips, costing less than $6 million
- It quickly overtook ChatGPT in Apple App Store downloads
Market Perspective:
- Some experts, like Marc Andreessen, called it AI's "Sputnik moment"
- Others, like Synovus Trust Company (a major Nvidia shareholder), viewed the selloff as an overreaction, noting that DeepSeek primarily competes with ChatGPT rather than Nvidia's core data center business
- The event triggered broader market concerns about the sustainability of AI-driven market valuations and led investors to seek safe-haven assets
This market reaction highlights how sensitive AI-related stocks have become to competitive threats, particularly from China, and raises questions about the sustainability of current AI-related valuations.
Is this the beginning of the end for the NVIDIA bubble?
The large caps, especially the magnificent seven, have carried the market in recent years. Smaller and mid-caps in the U.S. market have underperformed and offer better value. The issue is that the magnificent seven make up such a huge proportion of the S&P500 (about 36%, so the other 493 companies account for the residual 64%), so these fashionable companies are skewing the market. The danger in US equities is for the passive funds which have ridden the wave on the way up and so are disproportionately exposed to seven richly valued businesses. If there is a sell off in those companies, the index will drop significantly, and the passive investors will learn that what goes up, also comes down. The key is to be an intelligent active investor. Cherry pick strong businesses that offer good value. Some of these businesses are in more stable industries less prone to cyclicality and huge R&D expenditure that for the tech sector becomes necessary just to remain relevant - Moore's law springs to mind.
In September 2024 I reported that NVIDIA experienced the biggest daily drop in market cap in US history.
Yesterday that record was beaten by a factor of 2x by .... NVIDIA (again?!?!).
On January 27, 2025, Chinese startup DeepSeek's launch of a low-cost AI model triggered a massive selloff in tech stocks, particularly affecting Nvidia and other AI-related companies. The key impacts were:
Financial Impact:
- Nvidia lost $593 billion in market value in a single day, falling nearly 17% - the largest one-day market cap loss ever recorded on Wall Street
- The tech-heavy Nasdaq fell 3.1%
- Major tech companies were affected: Broadcom (-17.4%), Microsoft (-2.1%), Alphabet (-4.2%)
- The Philadelphia semiconductor index dropped 9.2%, its biggest decline since March 2020
Why DeepSeek Matters:
- The company launched a free AI assistant that uses less data and costs significantly less to operate than competitors
- DeepSeek-R1 is reportedly 20-50 times cheaper to use than OpenAI's model
- The model was trained using Nvidia's lower-capability H800 chips, costing less than $6 million
- It quickly overtook ChatGPT in Apple App Store downloads
Market Perspective:
- Some experts, like Marc Andreessen, called it AI's "Sputnik moment"
- Others, like Synovus Trust Company (a major Nvidia shareholder), viewed the selloff as an overreaction, noting that DeepSeek primarily competes with ChatGPT rather than Nvidia's core data center business
- The event triggered broader market concerns about the sustainability of AI-driven market valuations and led investors to seek safe-haven assets
This market reaction highlights how sensitive AI-related stocks have become to competitive threats, particularly from China, and raises questions about the sustainability of current AI-related valuations.
Is this the beginning of the end for the NVIDIA bubble?
I would not want to be invested in US equities right now, there are huge opportunities overseas.
The large caps, especially the magnificent seven, have carried the market in recent years. Smaller and mid-caps in the U.S. market have underperformed and offer better value. The issue is that the magnificent seven make up such a huge proportion of the S&P500 (about 36%, so the other 493 companies account for the residual 64%), so these fashionable companies are skewing the market. The danger in US equities is for the passive funds which have ridden the wave on the way up and so are disproportionately exposed to seven richly valued businesses. If there is a sell off in those companies, the index will drop significantly, and the passive investors will learn that what goes up, also comes down. The key is to be an intelligent active investor. Cherry pick strong businesses that offer good value. Some of these businesses are in more stable industries less prone to cyclicality and huge R&D expenditure that for the tech sector becomes necessary just to remain relevant - Moore's law springs to mind.