The AI race may have just changed overnight. Here’s what to make of this news…
Investors were treated to a rude awakening on Monday, as concerns about reports that a Chinese artificial intelligence service called DeepSeek was substantially cheaper and better than OpenAI.
As I mentioned in Tuesday’s Market 360, news broke over the weekend that DeepSeek claims that its R1 and V3 models performed better than or close to ChatGPT. What’s more, DeepSeek is bragging that its AI search algorithms use significantly less power than ChatGPT and other AI large language models (LLMs), though information on what percentage varies significantly.
Now, DeepSeek’s supposed success has occurred despite export curbs, implemented during the Biden administration, that were designed to limit the sales of the advanced AI chips that NVIDIA Corporation (NVDA) makes.
As a result, the entire roadmap of how AI is supposed to evolve is being questioned. Some investors are wondering whether or not the chip-hungry and energy-intensive U.S. AI industry will win the AI race. This led to a massive selloff in AI names, with NVIDIA losing a staggering 17%, and many of the AI infrastructure/power names lost even more than that.
This is a good time to remind all investors that the stock market is really just a manic crowd. The truth of the matter is crowds react and do not think. In fact, the bigger the crowd, the lower the IQ. So, during Monday’s selloff, the stock market’s violent reaction was particularly stupid, since investors were reacting with vigor and not thinking with equal vigor.
The stock market seems to be thinking more clearly again as investors reassess things and realize that we can’t take these claims at face value.
Still, President Donald Trump was right when he called the DeepSeek news a “wake-up call” for U.S. companies to reassert their dominance over AI.
If you’re one of the many investors who have been following the AI race closely, you’re probably wondering what to make of this news. So, earlier this week, InvestorPlace Editor-in-Chief Luis Hernandez sat down with the me, Eric Fry and Luke Lango – the creators of the AI Revolution Portfolio – to answer those questions and let you know what we believe investors should do now. (You can find out more about AI Revolution Portfolio by going here.)
Check out our conversation by going here, clicking the video or you can read the full transcript below.
As Luis explains, Eric, Luke and I built our AI Revolution Portfolio to represent the best-in-class stocks for the AI Boom.
Our focus is on finding the AI stocks that could go on to disrupt entire industries and, as a result, go up more than any stock over the next 12 to 36 months. Our AI Revolution Portfolio returned more than 21% last year… and continues to outperform the market this year.
While this week’s market volatility is no fun, at the end of the day, our AI Revolution Portfolio companies are pumping out more profits than anyone else…. and that’s why we believe this week’s selloff is so overblown.
To learn more about our AI Revolution Portfolio, click here.
Video Transcript
Luis Hernandez: Hi everyone. I’m Luis Hernandez, Editor-in-Chief at InvestorPlace.
The markets were rocked Monday when a Chinese AI lab released a new language model named DeepSeek R1. Experts noted that the performance of the model is as good as anything they’ve seen from any other provider.
But what’s really striking isn’t just the results, but the claims about the cost of its development. DeepSeek claims that its breakthrough model costs less than $6 million to train using inferior AI chips. OpenAI’s GPT model costs more than $100 million to train.
Almost immediately, DeepSeek became the most downloaded free app in the U.S. on Apple’s App Store, knocking ChatGPT down to second. Aside from the cheaper cost to train the model, DeepSeek is free for personal use and cheap for businesses. And because DeepSeek is an open-source platform, researchers and developers worldwide are rushing to get access and build on its capabilities.
Now, some hard questions are being asked about tech stocks and companies that have been riding the AI megatrend to big profits so far, especially the Magnificent Seven. The market is asking whether all the billions in spending planned by these companies is really necessary.
No one bore the brunt harder than AI megatrend poster child Nvidia Corp. (NVDA), which dropped 17% on Monday, with other chip makers such as ASML Holding N.V. (ASML) and Broadcom Inc. (AVGO) also taking hits. And let’s not forget that all this happened in the shadow of the Trump administration’s announcement of the Stargate Project aimed at making the U.S. the unrivaled world leader in AI. Noted Silicon Valley observer Marc Andreessen has called DeepSeek AI’s “Sputnik moment.”
For those who don’t remember, Sputnik was the satellite launched by the Soviet Union that kicked the Space Race into high gear. Are we looking at a similar race scenario for AI dominance?
Today, we’re going to get some answers about what to make of this news and what implications it might have for your portfolio.
I’m here with the three analysts who built the AI Revolution Portfolio, Eric Fry, Luke Lango, and Louis Navellier. If you don’t know the product, the AI Revolution Portfolio was built by these three editors to represent the best-in-class stocks for the AI Revolution.
They focus on finding the AI stocks that could go on to disrupt entire industries and, as a result, go up more than any stock over the next 12 to 36 months. The AI Revolution Portfolio returned more than 21% last year, and every stock in the portfolio is focused on the company’s best position to take advantage of the AI megatrend.
Thanks for being here, guys. I know it’s a short notice to call all of you here, but I appreciate your availability.
Eric Fry: Good to be here.
Luis: Eric, let’s start with you.
The three of you have been telling folks for a while that the next phase of the AI Revolution was going to be about AI appliers, those who are using AI to expand profit margins rather than AI builders such as you get with Nvidia and the other Magnificent Seven. Does all this sort of feed into that theory for you?
Eric Fry: I think it’s exactly right, Luis. I mean, obviously, yesterday’s announcement was a somewhat surprising one, and it was certainly a shock across the bow for hardware providers like Nvidia. But it is part of a theme, and it’s also part of the long-term legacy of technological innovation. Technology, as it becomes more ubiquitous… the price falls. This is a version of that.
Different innovators find ways to produce products more efficiently at better and better prices. And what was true of old technologies is also true of AI… or appearing to be true, anyway. I mean, we all have those examples. My parents bought a VCR in 1983. It was $800, so that’s almost $3,000 in today’s money. They didn’t stay at $800. They didn’t stay $3,000. So, this announcement is unnerving for some companies like Nvidia.
I don’t think it’s fatal by any means; but if you look at this canvas more broadly, as prices drop across the, we will call it the AI sphere, that’s going to promote its use, it’s going to promote ubiquity, it’s going to promote adoption. And that is a benefit in general to the companies that are applying artificial intelligence. It’s a dramatic moment. I don’t feel like it’s a terrifying moment. It’s just a step along the way.
Luis: Okay, great.
Louis, going back to that comment about this being AI Sputnik moment, how do you think the administration is going to respond to this kind of news?
Louis Navellier: Well, they already have. They basically said it’s a wake-up call, and Silicon Valley started to scramble obviously yesterday. And I’m sure they’re going to come back with something bigger and better. I think we’re all shocked by the timing of this. While this broke on Sunday during the football playoffs, most traders on Wall Street are big sports fans, so guess what they were doing?
And it just went down in the aftermarket and opened up low. But I’m very, very suspicious of it. At least it’s out there. It can be tested, but why wouldn’t you want better AI, more powerful AI?
So, this narrative that we can use the old Nvidia chips, we don’t need the new ones, that we don’t need extra power – DeepSeek says they use 29% less power – maybe they’re just not looking at certain things that other applications are, which might make some sense because you don’t want to run garbage in garbage out of your model.
So I think it’s basically China’s way of messing with us. And, of course, you can’t download TikTok now because it’s in limbo, and so maybe China wants to use DeepSeek to get all our personal data because they can’t get it from TikTok now.
Luis: Yeah, there’s certainly reason to be skeptical about claims made from China about various technologies because they’ve done that before.
Louis: Correct.
Luis: Luke, can you characterize market selloff as a big overreaction? Can you expand on that a little bit?
Luke Lango: Yes. We call it a big overreaction and a buying opportunity because, similar to what Eric said, but there’s actually a name for it. It’s Jevons Paradox, which is the idea that if you decrease the cost of a certain resource, if that resource is in high demand, then what you’re going to do is dramatically increase the demand for that resource because now it’s accessible and everybody can afford it or can use it.
And that’s exactly what’s going on here. I think of the build-out of fiber optic network, fiber optic cables in the 1990s is a very strong example of this. Before that, transmitting data over the internet was very slow and expensive. With fiber optics, it became fast and cheap; and, all of a sudden, the internet was beaming into everyone’s house. That’s when everybody was using the internet, and that’s when the real internet boom started. It didn’t result in less spend on internet infrastructure. It actually resulted in more spend on internet infrastructure because any decrease in unit pricing was offset by a larger increase in volume of usage.
And so that’s exactly what I think is going to happen here. There is that blowback where it’s like, “Oh no. All of a sudden, maybe we can’t charge a ‘bajillion quadrillion bajillion’ dollars for one single Nvidia GPU. Okay, sure.” But now people are going to buy a “billion bajillion quadrillion quadrillion”of them as opposed to one of them. So, you’re going to go and get this offset and volume increase, and so the overall spending pie to me doesn’t go down.
The reaction suggested the overall spending pie goes down. I think that’s incorrect, and you’re seeing a rethink, a rational rethink of that today. There’s been a lot of commentary over the last 24 hours that is very in line with what I just said, and you’re seeing a rational rethink in markets today. A lot of those names that were hit hard yesterday are rebounding today, though not recouping all their losses. Definitely the beginning of a nice little rebound, rebounding up big technical support levels and a lot of those names as well too.
So that’s how I view it. I do think it’s a very real breakthrough. The cost claims, who the heck knows? Nobody can really verify that. But the actual technological algorithmic breakthrough that they had with the Mixture of Experts model, that’s legit. That’s pretty impressive that they were able to do that. So, to me, it just means more ubiquity and more usage and more application. So I actually think it’s a long-term positive, not a negative, as the market may have took it that first time.
Luis: Hey, Eric, one of the concerns that you’ve been writing about is the sky-high valuations we’ve seen from so many stocks, especially the Magnificent Seven. I mean, is this kind of an opportunity for some repricing of all that kind of stuff?
Eric: Yeah, I think bubbles have a way of finding a pin. I don’t think it’s a bubble exactly, but the valuations are high, and they’re high for legitimate reason. These are world-dominated companies, and they remain so today. So, my knock on them wasn’t really, “Oh gee, these things are a house of cards.” It was simply the law of large numbers.
When you get high valuations, in order to make that investment work, you need to have great things continuing to happen, and you certainly can’t have any bad surprises. Whereas, if your valuations are more middling, the stakes aren’t as high. So, we saw that play out yesterday, particularly with Nvidia. High valuation, the news alarmed shareholders, stock tanked 20%, or whatever. That’s the kind of thing that happens to a company that’s richly valued.
It doesn’t mean Nvidia can’t recoup that loss. It just means that when you’re playing in names like that, you have to expect that any bit of bad news is going to be pretty harmful to their return profile. And so if you’re willing to stay with that, tolerate it, great. A lot of investors don’t like that kind of volatility, so you don’t want to play there.
Luis: Yeah. Louis, I was thinking of you because, of course, when I came in Monday, literally one of the first things I saw from Customer Service was some customer had called in to say, “Should I sell my Nvidia stock?” What would you say to that person since you hold Nvidia in some of your portfolios?
Louis: Well, not that I hold, it’s my largest holding. It’s a stock that can change your life, and it’s honestly changed my life. I mean, we’ve had it for five years, and this is our second time in it. So obviously, the capital gains consequences would be massive to sell it, and there’s no reason to sell it when a strong forecast in sales and earnings is getting more dominant.
I would add that Nvidia, believe it or not – I know it’s bouncing really strongly today – did exhibit rail of strength yesterday. And we were monitoring the companies that build out our power grid and the data centers, and those actually got hit a lot harder. And that’s ridiculous because those are long-term contracts, and once they start to expand the power grid, they’re not going to change because of one Chinese app, and that might be more efficient than ChatGPT.
So, Nvidia was exhibiting row of strength; and I told my wife to load up on it, and she did. All her cash is out in Nvidia as of Monday. So, it’s very exciting, and we don’t get these kinds of buying opportunities very often. But literally, a lot of the stuff that got hit on Monday is going to be up 20 to 30% as the earnings come out.
Luis: Now, Luke, it’s only Tuesday as we film this. So we saw the big dip on Monday, we saw some recovery for some stocks, like Louis just mentioned, on Tuesday. Do you think short term, we’re in for more volatility, or do you think this is going to play out over a longer period?
Luke: Oh, I think the buying opportunity is here for the next few days. So, short-term: big tech earnings. This model was the biggest slap in their face I have ever witnessed as a human being, right. I’ve never seen big tech so publicly embarrassed by a little Chinese startup. They are going to defend their turf on all those earning calls over the next two to three weeks. You best believe they’re going to come out swinging with everything to justify their massive CapEx, talk about all their advancements, and they’re getting close to AGI, and why they’re better than DeepSeek.
They’re going to be ready in their prepared remarks. They’re going to be ready for the Q&A because the analysts are going to grill them there, and big tech’s going to defend their turf very successfully. So, you’re going to get a bounce on that because big tech’s going to defend the turf.
I think Trump’s going to defend this turf because this was also a slap in the face to him. A week after, five days after, he announces a $500 billion initiative to build out AI data centers, all of a sudden, everyone on Wall Street’s questioning whether or not we need to build any more AI data centers, right.
It’s like, whoa!
So now, he’s got to go defend that. He’s going to defend that. So, you’re going to get the Trump defense, you’re going to get the big tech defense, and then you’re just going to get a rational rethink where it’s like, “Oh yeah, maybe their claims aren’t as strong as they probably first said they were.” So, I think between those three things, you’re going to get a very big balance in a lot of those names over the next two to three weeks.
Where it gets murky is beyond that. After big tech defends its turf, after Trump defends the Project Stargate, etc., etc., what happens when OpenAI integrates mixture of experts’ techniques into its modeling? Do they discover that maybe they don’t need as many? Who knows? I don’t know. That’s where it gets murky to me. Two to three weeks pretty clear. You’re going to get a very nice balance.
And I agree with Louis. I think a lot of those stocks that got hammered yesterday, the power names, they got crushed. Constellation Energy Corp. (CEG), Vistra Corp. (VST), those are low-beta stocks that drop 25% in a day. That doesn’t happen. Those are going to bounce 20 to 40% in the next two to three weeks, in my opinion. I think a lot of those names are going to come back with a vengeance. Two to three months down the road, that’s where it’s a little murky. But two to three weeks, I see a very strong short-term balance.
Luis: Bottom line, I think it’s pretty safe to say for the three of you, you’re still very bullish on the AI opportunity here, short-term and long-term, because of all the possibilities that can happen both with big tech and with opportunities for smaller companies now that may have a cheaper version of AI available.
Luke: I think to bring it back to our AI Revolution Portfolio… it was all about the application layer, right, the phase shift into applications. That’s what this is. That’s what I’m telling my subscribers is just that this really was the moment that we officially phase-shifted into the application layer. The breakthroughs prove that the ingenuity is going to be in software.
And now that this becomes a ubiquity, now that it becomes accessible, now that a lot of people can bootstrap models like this, you’re going to see the ingenuity happen at the software layer. And that’s where you’re going to see a lot of growth in the application stocks. So, we talked about the Monday price action. Louis absolutely right. Nvidia outperformed a lot of the big hardware stocks, but what was green on Monday? A lot of software names.
Luis: Yeah.
Luke: A lot of software stocks were green on Monday because it’s actually good for them. This is good for them. And so I think we’re now moving more firmly into that application layer. So I’m not going to pat ourselves on the back or toot our horn a little bit, but I do think it was very prescient to say a few months ago, “Hey, we’re gearing up to move into the application layer of the AI boom because I think we really are in it now.”
Eric: Yeah. What that means from a practical standpoint investing-wise or one of the things that it means is that the AI story has been somewhat monolithic for the last two years. There’s been sort of this big, “Okay, this is AI, and to buy AI, you have to buy these five names.”
Pick your terminology. When it becomes a software-centric opportunity like Luke is talking about or – and that’s a version of applied AI – now you’re talking about something that is heterogeneous and has tentacles all over the place where AI can impact individual companies that are either producing the software or applying the software. And that’s literally every industry on the planet.
So, all of a sudden, every industry in the planet becomes an AI play if they are developing an advanced capability because of AI. So I think it becomes much more interesting now for investors than it was in the first phase.
Luis: Terrific.
Louis: I would add that DeepSeek is open source. So in theory, a lot of the companies that are experimenting with it could have a DeepSeek button on their website. They want to see the DeepSeek AI solution. Of course, I’m sure ChatGPT would like to have a button there too. So this may be a start of the AI arms race, but they’re not going to stop development. It’s going to get bigger and bigger. Just look what Tesla Inc. (TSLA) is doing, mapping out all the roads with all their cars and trying to do self-driving based on all their cameras. The amount of power that takes is ridiculous.
Luis: Yeah.
Louis: So, it’s not going to stop, but it’s healthy. Competition’s good. Obviously, China wants to embarrass the United States, wants to dominate another industry, but Trump has all these allies in Silicon Valley. They were all at his inauguration. He was defending them at Davos, yelling at Europe for fining them and messing with Apple Inc. (AAPL) for taxes and things. So, it’s going to be an economic war with us in China, and we’ll see if we can win. We’ve been winning before.And we certainly got them outnumbered. So let’s just go have fun with this.
Luke: And that’s why I think the spending pie goes up, not down.
I mean, if anything, it’s like, wow, the race is on. The Sputnik moment – that the race is on. So maybe you were saying we were spending dumbly before, that doesn’t mean we’re going to stop spending. It means we’re going to spend more and then be smarter at the engineering as well. We’re going to do everything. We’re going to throw the whole kitchen sink, maybe the whole house at this now.
I just think that I wouldn’t be surprised. I mean, maybe I’d be a little bit surprised, but I think it’s possible that Project Stargate becomes a trillion-dollar project now because we have to win. If China really is doing that, we have to win. This is the final race of all races. Whoever gets to AGI wins world forever and ever, right. So you have to win. There’s no other choice.
If more money’s not doing it, then throw more money at it even still. That’s the American way. Bigger, bigger, bigger, bigger, bigger. So I think we’re just going to spend way more money. I don’t see the pie going down at all and actually think it’s a long-term pause to begin for all AI stocks. So yeah, just to piggyback on what Louis said, making this kind of a U.S. versus China, national security thing.
Luis: Okay, thanks again for your time, gentlemen.
Folks, these three analysts have been telling their followers that the next phase of AI is going to be the culmination of everything before it. It’s going to affect every aspect of society in ways we couldn’t imagine just two years ago.
We’ll keep you up to date on DeepSeek and all the other important AI news in the weekly updates to our AI Revolution Portfolio service, as well as regular updates on the stocks in the portfolio, the best of the best in AI.
Just a little over a month ago, our analysts added seven stocks to the portfolio, and as I record this, they’re all still below the buy-up to prices. So, there’s still a chance to get into your favorite stocks for 2025.
Make no mistake, folks. Anyone who misses this opportunity to invest in the best AI stocks now could end up missing their financial goals and jeopardizing their futures. You can click here to see a special offer so you can follow along with our expert picks in the AI Revolution Portfolio.
Sincerely,
Louis Navellier
Editor, Market 360
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
NVIDIA Corporation (NVDA)
