Nvidia’s stock price dropped by nearly 20% after DeepSeek’s R1 model was released, spooking investors in the artificial intelligence (AI) sector. However, the author believes this sell-off presents a buying opportunity for those looking to invest in Nvidia.
DeepSeek’s innovative breakthrough allowed it to train its AI model for $5.6 million, a fraction of what U.S. companies are spending on computing power. This raised questions about why the US is investing billions into AI when Chinese startups can achieve similar results at a lower cost.
Nvidia is the primary beneficiary of AI spending in the US, and most AI models are trained on its hardware. However, DeepSeek’s model was specifically designed for Nvidia’s H800 chips, which are not available in China due to export bans.
The author points to the Jevons paradox, a phenomenon where increased efficiency leads to increased consumption, as a reason to be optimistic about Nvidia’s prospects. As AI models become more efficient and cost-effective, demand is likely to increase, driving further growth for Nvidia.
Despite the sell-off, Nvidia’s stock still trades at 51 times trailing earnings and 44 times forward earnings, which are not historically cheap prices. However, the company’s revenue has been growing rapidly, with a 94% increase in the third quarter of fiscal 2025.
Management expects fourth-quarter revenue to be around $37.5 billion, indicating 70% revenue growth. The author believes this growth will continue, with Wall Street analysts expecting revenue to rise 52% in fiscal 2026.
The release of DeepSeek’s R1 model may have caused some market scares, but the author remains bullish on Nvidia’s investment thesis. With its dominant market position and strength in training AI models worldwide, Nvidia is well-positioned for continued success beyond 2025.
Source: https://www.fool.com/investing/2025/02/03/what-is-the-jevons-paradox-and-how-does-it-make