Nvidia’s artificial intelligence chip business is under scrutiny as the company prepares to report its quarterly earnings on Wednesday, with investors weighing the long-term sustainability of AI hardware spending. The rise of DeepSeek’s cost-effective AI models has led to growing speculation over whether expensive, high-performance GPUs remain crucial for AI development.
DeepSeek’s Impact on Nvidia’s Market Valuation
The emergence of DeepSeek’s low-cost AI models has rattled the semiconductor industry, prompting doubts about whether Nvidia’s premium-priced chips remain indispensable. The Chinese AI firm’s advancements have already caused Nvidia’s market capitalization to plummet by $593 billion in a single trading session, marking the largest one-day loss for any U.S. company.
Despite the setback, Nvidia’s stock has been among the strongest performers in 2023 and 2024, benefiting from an AI spending boom by tech giants like Microsoft and Meta.
Investor Concerns Over AI Hardware Spending
Some investors worry that DeepSeek’s breakthrough could impact demand for Nvidia’s most advanced AI chips. Ivana Delevska, Chief Investment Officer at Spear Invest, noted that investors are closely watching Nvidia’s earnings for signs that the company can maintain its strong growth trajectory.
“If they (Nvidia) can show that they’re still able to ‘beat and raise,’ it would be pretty positive for the stock,” Delevska said.
Nvidia is projected to report a 72% increase in revenue to $38.05 billion for its fourth quarter, according to LSEG data. However, this represents the company’s slowest growth in seven quarters, compared to the triple-digit revenue surges it had recorded in the previous five quarters.
Tech Giants Continue Heavy AI Investments
Despite concerns about DeepSeek’s impact, demand for Nvidia’s AI chips has not slowed down. Leading tech firms, including Microsoft, Meta, Google, and Amazon, have reaffirmed their commitment to AI investments and data-center expansions, which are expected to support Nvidia’s near-term growth.
“The CapEx plans communicated by Meta, Microsoft, Google, and Amazon paint a very positive picture of the near-term demand backdrop for Nvidia,” said John Belton, portfolio manager at Gabelli Funds, which holds Nvidia shares.
Blackwell Series: High Demand, Higher Production Challenges
Nvidia’s newest AI chip architecture, Blackwell, has seen accelerated shipments in the fourth quarter, contributing to higher revenue but squeezing profit margins due to the high cost of ramping up production. Analysts estimate that Nvidia’s adjusted gross margin will decline by more than three percentage points to 73.5% in the latest quarter.
With Blackwell’s launch, Nvidia is shifting from selling standalone chips to offering full AI computing systems, such as the GB200 NVL72, which integrates GPUs, CPUs, and networking hardware. This transition, while lucrative in the long run, has introduced new manufacturing complexities, slowing down production and increasing costs.
Nvidia’s contract manufacturer, Taiwan Semiconductor Manufacturing Co. (TSMC), has struggled to expand capacity for advanced chip packaging, a key bottleneck in AI semiconductor supply chains. Additionally, Blackwell’s rollout faced early design flaws and low chip yields, although Nvidia has since resolved these issues.
Also read: DeepSeek AI App Faces Security Warnings in South Korea
Outlook for Nvidia’s AI Business
Despite the near-term production challenges, Nvidia has expressed confidence in Blackwell’s long-term revenue potential. In November, the company said Blackwell sales would surpass initial projections of several billion dollars in the fourth quarter.
“Blackwell has been a complicated set of products to launch,” said an industry analyst. “With the magnitude of outperformance that investors have become used to, Nvidia’s delivery could be smaller this time around, just given some of these dynamics with the Blackwell launch.”
While Nvidia remains at the forefront of the AI hardware market, the rise of cheaper AI alternatives like DeepSeek will continue to shape the debate over AI hardware spending and technological supremacy in the coming years.
This report was first published by Reuters.
