NVIDIA (NASDAQ:) stock returned to its lows of the week on January 30. Down more than 16% for the week, the question on many investors’ minds is what will it take to stop the slide?
The most recent news causing NVDA stock to slide comes from rumblings that the Trump administration may impose export restrictions on the company’s chips to China. This is in response to DeepSeek, an open-source large language model (LLM) that China reportedly developed for approximately $6 million.
To put that in context, Meta Platforms (NASDAQ:) recently announced plans to spend $65 billion to upgrade its AI infrastructure in 2025 alone. And with the AI sector still in the buildout stage, a hefty amount of that $65 billion would be spent on hardware in the form of GPUs from NVIDIA.
Investors Sell the News, But the Question Is Why?
Investors sold heavily on the news, and the knee-jerk explanation was that companies would curb spending on AI infrastructure and start using the less-expensive open-source model.
There are several reasons to debate that. First, since DeepSeek hit the scene, many analysts have already pointed to the limitations and biases embedded in DeepSeek. They also note that it’s likely that the Chinese LLM used a significant amount of NVIDIA GPUs in its creation.
If that were the case, the NVDA stock rally would surely have held. Instead, the more likely reason for the price action is that investors saw an opportunity to do what they’ve wanted to do for some time with many technology stocks. That is, take a little profit and drive the stock price lower. In other words, never let a crisis (even a manufactured one) go to waste.
NVIDIA still trades at over 44x forward earnings and has a price-to-sales ratio of over 49x. There’s no question that even with this pullback, investors continue to pay a premium to own the stock.
Why NVIDIA GPUs Will Remain in Demand
However, there are times when a stock is worthy of its premium price tag. And that appears to be the case with NVDA stock. The company launched its Blackwell chip and reports excess demand despite being at 100% capacity.
Critics will say that the existence of low-cost LLMs will drive that demand curve lower, but that may not be a good bet. Palantir Technologies (NASDAQ:) CEO Alex Karp has frequently commented about the benefit of his company’s proprietary LLM, which makes AI more than “just a toy.” Corporations realize that and are starting the process of developing more advanced versions of AI models.
This quest for innovation is the real driver for AI spending, not in maintaining the status quo. To do that, the industry will continue to need hardware. And NVIDIA remains the clear leader in that area.
Analysts to the Rescue
It’s important to note that NVIDIA stock continues to be under pressure despite the fact that analysts are brushing aside the DeepSeek news. Since Monday, January 27, Cantor Fitzgerald and Morgan Stanley have reiterated their Overweight ratings on the stock. Tigress Financial upgraded NVDA from a Buy to a Strong Buy and raised its price target from $170 to $220.
The NVDA Chart Signals Choppy Price Action
Traders can’t help but notice that NVDA stock recently slipped below its 200-day simple moving average (SMA). Technical analysis isn’t a perfect indicator, but this is almost always a bearish indicator that suggests the long-term direction of the stock has changed.
The stock first dipped below the 200-day SMA on January 24 but recovered at the start of the next week.
It’s also important to note that this most recent dip is happening on lighter volume, which may indicate a lack of conviction. The Relative Strength Indicator (RSI) is also moving into an Oversold range of around 38.
If the stock continues to go lower, how low could it go? The charts suggest that if the breach of the 200-day moving average holds, the stock could reach its September 2024 low of around $103.
Investors should expect price action to be choppy before the company’s earnings report in February. It’s unlikely that institutional investors will want to plant their flag in one camp or another. However, this could work to the benefit of retail investors who are convinced to buy this dip.
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