Following DeepSeek's arrival, Nvidia's share price has been declining steadily, and despite positive earnings news, the company's poor guidance prevented the trend from being reversed
Track all markets with TradingView Over the last two years, Nvidia's share price has experienced seismic gains that have elevated the company from mid-cap obscurity to one of the most valuable in the world, becoming a stock market sensation in the process.
Although Nvidia's stock has increased by approximately 44 percent over the last two years as of February 28th, the share price has dropped 9 points to 7% so far this year. Considering that Nvidia once appeared to have unstoppable momentum, why are investors selling off the stock?
Despite dropping about 13 percent during the month, Nvidia (NASDAQ:NVDA) was the most popular stock purchased on the Interactive Investors platform in January. The dominance that Nvidia and the other Magnificent Seven stocks had built for themselves was in danger of being upended by the unexpected arrival of artificial intelligence (AI) start-up DeepSeeks.
Watch every market on TradingView "Nvidia, which was once the most valuable company in the world with a £3.05 trillion market cap, lost almost £600 billion in market value and dropped to third place after China's DeepSeek emerged," said Sam North, eToro's market analyst.
The biggest single-day loss for any company in stock market history was caused by the decline in the value of Nvidia's shares.
Even though DeepSeek's shadow persisted throughout this year's major tech earnings season, Nvidia's stock was obviously the most negatively affected.
Despite a gain in after-hours trading immediately following the release, Nvidia's shares fell 8 points 5 percent the next session, despite the optimism of Nvidia bulls that its earnings report on February 26 would reverse the trend.
Nvidia's poor forward guidance, which failed to reassure investors about the threat DeepSeek poses to its long-term business model, is the main cause of the sell-off in the company's shares.
What impact did DeepSeek have on Nvidia's stock?
DeepSeek was the sole obvious cause of Nvidia's share price decline.
This Chinese AI start-up, which has much lower reported training costs than US alternatives like ChatGPT, became the top-rated free app on the US App Store in January, sending tremors through the stock market.
Nvidia's stock suffered especially since DeepSeek was not built using its high-performance graphics processing units (GPUs), which were thought to be essential for creating high-performance AI models.
In order to get around US export restrictions on the best-performing chips, the app was instead developed using less sophisticated Nvidia H800 chips.
Because Nvidia's massive valuation was based on the anticipation of exponential future growth, this presented a challenge for the company. Assuming that only its chips could power the most sophisticated AI models, this expectation gave Nvidia nearly complete pricing control and virtually limitless demand.
According to eToros North, DeepSeeks' success "highlights that expensive cutting-edge chips may not be essential for AI breakthroughs."
Accordingly, it is not your fault if shareholders felt it was not worth the fifty times trailing earnings it had been trading at. The massive sell-off began.
Was it a bit exaggerated, though? It's easy to fall for the trap that DeepSeek has destroyed the investment case for Nvidia's stock.
In a thematic research note obtained by BFIA, Adrian Cox, a research analyst at Deutsche Bank, writes, "The emergence of DeepSeek prompted a 17 percent one-day drop in Nvidia stock on the mistaken belief that the latest chips were no longer needed for AI."
Cox was writing about a particular releasethat of deep researchthat was introduced on February 2nd by OpenAI, the company that created ChatGPT, and roughly corresponded with DeepSeek.
"You can never have too much computing power," Cox writes, citing extensive research. He draws attention to a division of AI tools into two extremes: powerful, cloud-hosted deep research models like OpenAIs, "where there is no let-up in the arms race for more and more compute," and small models like DeepSeek, which function well on a phone.
According to DeepSeeks' appearance thus far, there is no indication that this market will be disrupted.
Nvidia still has good news, even if it is at the less technical end of this spectrum.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, tells BFIA, "There's an argument that even if the cost of compute lowers quickly, it just means more companies will have access and the ability to create AI products and the overall aggregate demand for Nvidia's product can actually still grow in that environment."
This is referred to as the Jevons paradox in economics.
After earnings, why did the price of Nvidia's stock drop?
Despite this, markets were anxious before Nvidia's earnings announcement.
Investors were hoping that the company, which has a history of exceeding analyst expectations in recent years, would once again dazzle the world with impressive results andmore importantlyforward guidance that demonstrated its ability to withstand the DeepSeek storm.
On the first point, it succeeded. Earnings per share (£0.89) and quarterly revenue (£39.3 billion) both exceeded analysts' projections (of £38.08 billion and £0.85, respectively).
At first, markets embraced the optimism. When CEO Jesen Huang dismissed the implications of DeepSeek for AI demand, Nvidia's share price increased 21.1 percent in after-hours trading.
Huang praised the innovation, although he pointed out that it depends on "a world-class reasoning AI model" that unavoidably uses a significant amount of processing power.
On February 26, 2025, the Nvidia headquarters in Santa Clara, California, have a sign with the company's logo.
Santa Clara, California is home to Nvidia's headquarters. Nvidia's stock price increased in post-hours trading following the release of its earnings, but it later declined.
(Photo courtesy of Justin Sullivan/Getty Images) However, the following day, things took a different turn.
Nvidia's earnings release had some negative aspects, especially rather unimpressive forward guidance that suggests a significant slowdown in the company's revenue growth rate and tariff updates from US President Donald Trump that caused a sell-off in riskier assets.
The shares of Nvidia, which were priced for perfection, took a severe beating and dropped 8.5 percent.
Does Nvidia's stock offer a good deal?
Although the high price of Nvidia's stock has caused many investors to pause over the past two years, it has, in fairness, significantly decreased from the stock's peak trailing earnings of 100 times.
As of the US market close on February 28, stockanalysis.com shows that Nvidia's stock is currently trading at 42.49 times trailing earnings and 27.80 times projected earnings, following a recent decline.
As always, though, investors should do their own extensive research and weigh the risks of the downside before purchasing shares.
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