We are maintaining our $130 per share fair value estimate for Nvidia NVDA despite the selloff in artificial intelligence stocks on Jan. 27. We believe the selloff is related to the better-than-expected performance of R1, the recently released open-source reasoning model from Chinese company DeepSeek. R1 is believed to be on par with some of the best models released by OpenAI and others despite not having access to leading AI accelerators, such as Nvidia’s best Hopper and Blackwell products. This raises concerns that future LLMs will be developed with fewer AI GPUs from Nvidia, lower capital expenditure from hyperscalers, and perhaps less of a need for a massive energy buildout in the United States. This development may even be used to argue for stronger US sanctions on China, which could further weigh on the sector.
The selloff brings Nvidia’s stock price near our fair value estimate, which we think balances the massive risks and rewards associated with AI. We reiterate our Uncertainty Rating of Very High, as AI is changing at warp speed. We view DeepSeek as a counterbalance to the bullish news we heard last week around the Stargate venture and Meta Platforms’ META robust capex plans of $60 billion-$65 billion next year.
Our fair value estimate for Nvidia does not hinge on the company’s ability to sell into China. If stronger US sanctions emerge, we don’t think they’d be catastrophic for our estimate. Further, we’ve long expected new AI techniques and slimmer LLMs—although not necessarily from China, given US sanctions and AI constraints.
Despite DeepSeek’s promise, we doubt the leading cloud vendors and AI builders will pause their plans, although it’s a risk that certainly bears watching. We believe AI GPU demand still exceeds supply, so while slimmer models may enable greater development for the same number of chips, we still think tech firms will continue to buy all the GPUs they can as part of this AI “gold rush.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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