Why NVIDIA's share price dropped 17% after DeepSeek news
NVIDIA's stock suffered its largest single-day decline on Monday, falling 17% after Chinese startup DeepSeek unveiled a cost-effective AI model.
What caused NVIDIA's stock drop?
NVIDIA's share price experienced an unprecedented decline on Monday, January 27 2025, falling 17% and erasing nearly $600 billion in market value.
The dramatic sell-off was triggered by Chinese startup DeepSeek's announcement of their R1 artificial intelligence (AI) model, which reportedly achieves similar performance to Western models at significantly lower cost. DeepSeek's breakthrough has raised questions about future demand for high-performance AI chips, NVIDIA's core business. The model was developed using stockpiled NVIDIA graphics processing units (GPUs).
This development sent shockwaves through the semiconductor sector, affecting other major players like Advanced Micro Devices (AMD).
Market impact and broader implications
The semiconductor sector saw widespread declines as investors reassessed valuations. Companies including Marvell, Broadcom, and Taiwan Semiconductor Manufacturing Company (TSMC) all experienced significant drops. The US technology sector as a whole dropped by 5.6% on Monday.
The market reaction reflects growing concerns about competitive pressures in the AI chip industry, particularly from Chinese companies developing more cost-effective solutions. These developments could impact how tech companies approach AI infrastructure investments, potentially focusing more on optimising existing resources rather than continuous hardware upgrades.
However, some analysts suggest the market reaction may be overdone, citing potential benefits from increased AI adoption and efficiency.
Long-term outlook for NVIDIA
Despite the immediate market reaction, NVIDIA maintains a strong position in the AI sector. The company remains a crucial partner in major US AI infrastructure projects. Some industry experts, including Microsoft CEO Satya Nadella, argue that more efficient AI models could actually expand the market, potentially benefiting established players like NVIDIA.
This concept, known as the Jevons Paradox, suggests that increased efficiency often leads to higher overall demand rather than reduced consumption. NVIDIA's future success will likely depend on its ability to adapt to evolving AI technologies while maintaining its technological leadership.
Trading considerations
Investors should consider both short-term volatility and long-term growth potential when evaluating semiconductor stocks. The sector may see continued turbulence as the market adjusts. Risk management becomes particularly important during periods of heightened uncertainty. Using tools like trading alerts can help monitor market movements.
Technical analysis
Technical analysis suggests that at least a medium-term top has been formed in NVIDIA's share price performance since a fall through its one-year uptrend line at $125.31 has taken place.
The question is whether ahead of Friday’s weekly close NVIDIA's share price can recover to above the breached uptrend line at $125.31. Were this to be the case, the long-term uptrend would simply flatten slightly but nonetheless remain bullish while this week’s low at $116.70 underpins on a daily chart closing basis.
In such a bullish scenario at least partial closure of this and last week’s price gap at $128.40 to $137.09 may ensue.
A fall through Monday’s $116.70 low would put the 55-day simple moving average (SMA) at $112.46 on the cards and may even lead to a sell-off towards the September low at $100.95 and the psychological $100 mark unfolding.
Provided Monday’s low at $116.70 underpins, the severity of the decline may create opportunities for long-term investors.
Having said that, consider diversifying exposure across different segments of the tech sector to minimise risk from company-specific events.
NVIDIA weekly chart
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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