The soaring popularity of Chinese AI engine DeepSeek-R1, reportedly developed for the relatively low-price tag of $5.6mn has sparked intense debate around the demand outlook for Nvidia’s high end computer processors.
However DeepSeek has struggled to cope with the influx of users, prompting Nvidia to highlight the strong demand for some of its product range as the focus of Artificial Intelligence moves from the training of models to inference where trained models are applied to new data to make decisions or predictions in real-time.
The shares have declined by 18.7% over the last week.
Our view
DeepSeek’s success can be seen as a step change in cost-efficiency for those that use NVIDIA’s high-end microchips. Investor sentiment has slumped on fears that demand has been overstated. Certainly, this has the potential to dent demand in the near term. But efficiency improvements are a natural part of technological development and can actually increase the total addressable market for computing power by making it cheaper and more accessible. We remain encouraged by recent investment commitments in the space, made both by sovereign nations and businesses. However, there’s no guarantee that these will result in further orders for NVIDIA’s products.
It’s not just the chips that make NVIDIA’s product so appealing, the CUDA software platform that enables users to optimise the hardware is key. Competition will come from the other mega tech companies who are working hard to build in-house chips, and specialised companies looking to solve more specific problems. But we think these will remain edge cases for a good while yet, enabling NVIDIA to continue to enjoy its dominant position over the next few years.
The question of return on investment is also valid. For now, NVIDIA’s biggest customers, like Meta and Microsoft, are happy to build now in anticipation of the products coming down the line. Over the next year, it’s vital that those using NVIDIA hardware to build AI products start to see the benefits. There’s already a solid library of use cases as multiple industries change how they work. Notable examples include automated diagnostic tools, robotic customer service agents, and models to drive down organisations' carbon footprints.
An overlooked strength is how capital light NVIDIA’s business is, and when combined with strong cash flows and a healthy balance sheet, there’s plenty of scope for share buybacks and dividend payments. Though, nothing is guaranteed. The strong financial profile is partly down to its outsourced manufacturing model. That means its ability to scale is dependent on key partners. Their plans to raise capacity look to broadly match the expected ramp-up in demand for the company’s products. But blockages in the supply chain remain a risk to be wary of.
Concerns about the demand outlook have seen the valuation fall below the long-term average. For a company forecast to nearly double revenue to around $240bn over the next two years, the market reaction looks to be overdone.
We still think the long-term case for a continued build-out in data processing infrastructure remains intact, and there’s been no sign of market forecasts pulling back. However, the spotlight on financial performance is shining brighter than ever on NVIDIA and any sign of weakness is likely to be seized upon by the market.
Environmental, social and governance (ESG) risk
The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly-specialised workers means labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.
NVIDIA’s management of ESG risks is considered strong by Sustainalytics. As the market leader in power- hungry GPU processors it’s recognised for paying close attention to the energy efficiency of it products. Business ethics concerns are addressed by Nvidia’s compliance committee, which comprises the CFO and several other senior managers. Additionally, a third-party hotline is available for both employees and third-party stakeholders to anonymously submit ethical concerns. Its human capital initiatives are also strong, which is reassuring given the talent gap in the industry. However, diversity amongst the workforce could still be improved.
NVIDIA key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
Photo by Justin Sullivan/Getty Images.
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