All eyes have been on big technology stocks thanks to the emergence of Artificial Intelligence and the need for software that can meet the need for massive amounts of data. Most big technology stocks are expected to do exceptionally well in 2025.
In 2024, Nvidia Corporation stock rallied an impressive 171%. At the start of 2025, analysts expected the NVDA stock to rally a further 65% this year to a high of $220.00 per share. But as is often the case, you can never get complacent when it comes to investing.
Why Are Big Technology Stocks Getting Hammered?
Big tech stocks were routed on January 27 after claims that a new AI model from Chinese startup DeepSeek performs just as well as OpenAI’s ChatGPT but uses cheaper semiconductor chips and less data. Instead of costing more than $100 million to train, DeepSeek’s AI assistant was created for just $5.6 million.
This news sparked concerns that going forward, AI models will need fewer chips and use less energy. If DeepSeek’s claims are true and adopted broadly, AI modelling training costs could drop significantly. It also puts into doubt the need for microchip clusters needed to drive AI technology.
Nvidia Corporation, which is the largest company in the world, has grown so quickly so far due to the massive demand for its AI chips that help train AI models. But news of DeepSeek’s cheaper AI model has, for now, rattled the markets.
The NVDA stock plunged more than 18% after the opening bell on Monday, January 27, 2025, wiping more than $465 billion from its market capitalization. It was the biggest one-day drop in stock market history.
Fellow “Magnificent Seven” stocks also took oversized hits, with Microsoft, Alphabet, Meta, Amazon, and Tesla down more than 3% in early trading. Broadcom and Micron Technology, two other big semiconductor stocks, were down by more than 13%.
Is the Big Sell-Off in Tech Stocks Justified?
By all accounts though, as great as DeepSeek may be, the sell-off in big tech stocks appears overblown. DeepSeek’s performance is noteworthy but the $5.6 million cost doesn’t factor in other costs associated with prior research and experiments, data, or algorithms.
Then there are tighter U.S. export restrictions that limit China’s ability to buy Nvidia AI chips through resellers and access chips in data centers. As a result, DeepSeek’s use of Nvidia’s chips could be seriously curtailed. On top of that, President Trump recently announced the Stargate AI project, a $500 billion private-sector investment designed to build AI infrastructure in the U.S.
The big sell-off also comes at a time when the “Magnificent Seven” stocks are expected to see earnings grow by 21.7% in the fourth quarter of 2024; more than double the 9.7% earnings growth forecasted for the other 493 tech stocks.
While the strong year-over-year growth rate for the “Magnificent Seven” is expected to slow in the first quarter, earnings are projected to advance more than 24% in the third quarter.
That kind of growth cannot be ignored. At the same time, if the Magnificent Seven earnings don’t live up to expectations, it will put their loft valuations into question.
Still, the fact that one news story can derail the technology sector shows that investors can never get complacent. Even with big technology stocks and the rise of AI, there are always risks.
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