Nvidia’s AI Chip Demand Under Scrutiny Amid DeepSeek Disruption

Nvidia (NVDA) faces growing investor skepticism ahead of its earnings report on Wednesday, as concerns rise over whether high-priced AI chips will remain essential in the wake of cost-effective models from China’s DeepSeek.

DeepSeek’s Impact on Nvidia’s Market Value

Nvidia has been the primary beneficiary of a massive AI-driven spending surge over the last two years. However, DeepSeek’s AI models, which claim to rival Western alternatives at a fraction of the cost, have led some investors to question whether Nvidia’s advanced chips are still indispensable.

DeepSeek’s rise in January triggered a record $593 billion drop in Nvidia’s market value—the largest single-day loss for any U.S. company. Despite this, Nvidia shares were among the top performers in 2023 and 2024.

Earnings Outlook: Slowing Growth

Nvidia is expected to report a 72% year-over-year revenue increase to $38.05 billion for its fourth quarter, per LSEG data. While this remains strong, it marks the company’s slowest growth in seven quarters. The forecast for Q1 2025 revenue is a 60% increase.

For five consecutive quarters before Q4, Nvidia posted triple-digit revenue growth, fueled by soaring AI-related spending. However, slowing momentum has raised questions about long-term demand.

Major Tech Firms Continue AI Spending

Despite concerns, key Nvidia customers—including Microsoft (MSFT) and Meta (META)—have reaffirmed their commitment to aggressive AI-related capital expenditures. Analysts suggest this will sustain strong near-term demand for Nvidia’s chips.

John Belton, portfolio manager at Gabelli Funds, which holds Nvidia shares, noted that the CapEx plans from major cloud players like Microsoft, Google, Amazon, and Meta paint a “very positive picture” for Nvidia.

Blackwell Chip Rollout: A Double-Edged Sword

Nvidia’s newest Blackwell chips are expected to have boosted Q4 revenue. However, their rollout has been costly and challenging, potentially squeezing profit margins.

• Analysts project Nvidia’s adjusted gross margin to decline by over three percentage points to 73.5% in Q4.
• The shift from selling standalone GPUs to full AI computing systems (such as the GB200 NVL72, which integrates GPUs, CPUs, and networking components) has made production more complex.
• Taiwan Semiconductor Manufacturing Co. (TSMC), Nvidia’s contract manufacturer, has faced bottlenecks in advanced chip packaging, slowing production.
• Early design flaws and low chip yields further hampered Blackwell’s launch, although Nvidia has since resolved these issues.

Investor Expectations for Earnings Call

In November, Nvidia stated that Blackwell would exceed initial Q4 revenue projections of several billion dollars. However, with the chip’s production challenges, some analysts believe Nvidia’s earnings surprise could be smaller than in past quarters.

“With the magnitude of outperformance that investors have become used to, Nvidia’s delivery could be smaller this time around,” said Gabelli’s Belton.

As Nvidia prepares to report, all eyes will be on whether it can maintain its AI dominance or if alternative solutions like DeepSeek will begin reshaping the industry.