28th January 2025

Index Movement Last Week

S&P500+1.8%
Nasdaq+1.6%
Aussie All Ords+1.2%

The S&P500 ended last week at a new high, over 6100. But rather than talk about that, this week we are going to dedicate the Catch-Up to the news that hit the tapes on Monday while we were all off throwing another shrimp on the barbie.

NVidia stock fell 17% on Monday. That move wiped $600billion off the market cap and it went from the worlds most valuable company to number four in a single session. Because NVidia is such a large weighting in the indexes, it led to a 1.4% drop in the S&P500 and a 2.95% drop in the Nasdaq.

Why?

Because developers at DeepSeek, a Chinese startup, released information that said their open-source AI model was at least as good as ChatGPT and they claimed it cost a lot less to make than American models. But they did not provide any evidence of their spend.

As you are probably aware, the US is in a battle with China to develop and protect AI models. The Biden administration tried to limit China’s access to NVidia chips, which are considered the gold standard for AI models.

DeepSeek claims to have developed their model using other chips (we don’t know for sure) and they claim they did it in 2 months (no evidence provided) and they claim it costs significantly less (no evidence of spend).

For a long-time investors have known they cannot trust Chinese economic data. Investors rather believe the China Communist Party tells their economic bureau what numbers they want them to state. How is DeepSeek any different? If we can’t really trust Chinese economic numbers, can you trust DeepSeek statements?

What isn’t in question is the DeepSeek AI capability with tests showing very similar if not superior results.

You could look at this as inevitable advancement by disruptors. Having limitations placed on them by quality of chips, the Chinese did what they do best, and replicated a US product using inferior technology.

So is this the end of NVidia?

Clearly not.

US companies are still going to buy NVidia products and AI is going to continue to develop. We are at the start, not the end, of this story. AI is only going to get more and more complex. The easiest time to replicate AI ability using inferior chips is now. Once the advances are made, they will need more advanced chips to run AI models.

NVidia knows this which is why it is spending so much on developing the next, newer, more powerful chip.

More importantly, only three days after the DeepSeek bombshell landed with global AI scientists in the West, Mark Zuckerberg announced that Meta will spend $65 billion in 2025 to expand its AI infrastructure. This money will be spent developing a 2-gigawatt data center that will be large enough to cover a significant part of Manhattan.

Brad Smith, president of Microsoft (MSFT), said in a blog post earlier this month that the company would spend $80 billion in 2025 building out AI infrastructure.

NVidia will capture the majority of this spend.

And whilst the selling on Monday looked bad at the headline number, under the hood it looks very different indeed. Yes, Nvidia was down 17.0 percent.  But Apple/Meta were up nicely (3.2 and 1.9 percent, respectively), Amazon was up slightly (+0.2 pct), and Microsoft/Alphabet were lower (-2.1/-4.0 pct) but nowhere near as much as NVDA.

The events of yesterday represent a very simple decision. Do you think the DeepSeek announcement is the end of NVidia.

Yes – then move on to the below comments

No – then buy NVidia today at a deep discount to last week

Taking this one step further……Let’s pretend the DeepSeek announcement changes AI by making it cheaper to run and that it uses less electricity.

Would that be a good or bad thing for Big Tech?

Big Tech has already spent tens of billions on chips. What is done is done and it is irrelevant in the future value of the company in question.

But it would mean cheaper AI leaves them more money to return to shareholders either as dividends or stock buybacks.

Every large US Big Tech company has an existing large global customer base. Instead of focussing on building AI, they can focus on tools to monetise it. This has been the missing piece of the puzzle since ChatGPT launched in October 2022.

I can’t see how the DeepSeek announcement is bad for the majority of Tech companies. It either makes no difference or improves things. It will take some time for markets to really work through yesterday’s news. In the end though, Big Tech has many more competitive advantages than just AI. AI is just icing on the cake for them.

Yesterday was also a keen reminder of what to expect if you chase the high fliers like NVidia. Things can change by a large degree and suddenly. If you want the exciting names, you must be ready to live through the exciting times.

The Coming Week

This is going to be a very busy week. The Fed meets and announces interest rates on Wednesday. They won’t move them but their comments will be deeply analysed. We will also have earnings from Meta, Microsoft, Apple and Tesla as well as oil majors Chevron and Exxon.

In Australia we will get inflation numbers. Some commentators are saying a low number will lead to a February interest rate cut. That won’t happen because the number will not be very low and employment is still too high. But a high inflation number will rock the market.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.