Over the last few days, the financial world has gone into a tizzy over a new start-up in the artificial intelligence (AI) realm. Chinese company DeepSeek sent shockwaves around the world after releasing a model akin to ChatGPT.
The primary reason investors are panicking is because DeepSeek claims to have trained its model on older, less sophisticated chipware from Nvidia (NASDAQ: NVDA). These claims have left investors scratching their heads, questioning if Nvidia’s newer architecture is worth the hefty price tag.
As a result, shares of Nvidia have gone into a days-long downward spiral. Is this a buying opportunity, or could Nvidia stock be headed much lower?
Below, I’m going to analyze some interesting trends in Nvidia’s stock and make the case for what direction I think shares could be headed.
The graph below illustrates multiple sell-offs seen in Nvidia stock in the days following DeepSeek’s arrival. Though you’d think declines of this magnitude say it all, there’s actually something pretty interesting going on in the background.
When a stock price moves, so does the value of the company. In the case of Nvidia, the company’s cratering share price has resulted in as much as $600 billion of lost market capitalization.
On the surface, this looks horrific. However, as it often is the case with investments driven by overwhelming emotions, there’s more than meets the eye.
Since Nvidia’s market cap has dropped, so, too, have its valuation multiples. As of this writing (Jan. 29), Nvidia’s forward price to earnings (P/E) multiple is 30.1.
Below, I’m going to dive into why this contraction in valuation multiples is important and what history suggests could happen next.
In the table below, I’ve summarized Nvidia’s forward P/E as of quarter end for the last year.
| Category | 10/31/2023 | 1/31/2024 | 4/30/2024 | 7/31/2024 | 10/31/2024 | Current |
|---|---|---|---|---|---|---|
| Forward Price to Earnings (P/E) | 24.5 | 30.4 | 35.7 | 44.6 | 33.9 | 30.1 |
Data source: Yahoo! Finance.
The last time Nvidia’s forward P/E hovered around 30 was last January. This is important to note because back in January 2024, Nvidia’s market cap was $1.5 trillion — approximately half of what it is today.
Given the parity between the company’s forward P/E between now and a year ago, you might be inclined to think Nvidia stock will soar higher — as was the case throughout 2024. While such dynamics are what history suggests could happen, there is some important nuance to consider this time around.
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