Why Nvidia stock just rallied

Fears regarding the rise of artificial intelligence (AI) chatbot DeepSeek may be overblown.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Shares of Nvidia (NASDAQ: NVDA) surged higher on Tuesday, after taking it on the chin Monday. The maker of graphics processing units (GPUs) used for artificial intelligence (AI) applications had gained 8.82% by the close of trade.

Investors have had a day to digest the news about reported AI developments in China -- and cooler heads are beginning to prevail.

On the heels of a rout

Nvidia stock was crushed on Monday following reports that Chinese AI start-up DeepSeek developed an AI model that delivered comparable results to existing chatbots at a fraction of the cost. The model, dubbed R1, reportedly used far fewer computing resources and was developed using older, less advanced AI chips.

Some investors were concerned this could tank demand for Nvidia's top-shelf processors, and the stock plunged 17%, wiping nearly $600 billion from its market cap.

Many on Wall Street believe the selling has simply gone too far. After digging into the data, Baird analysts are "skeptical" about reports that less advanced chips were used in R1's development. They further believe strong demand for Nvidia's flagship Hopper and Blackwell processors will continue.

Tigress Financial upgraded Nvidia to a strong buy and increased its price target to $220, which represents potential upside for investors of almost 71% compared to today's price. The analysts posit that demand from data centers will remain strong. Nvidia is the leading provider of data center GPUs and stands to benefit from this ongoing trend.

Wedbush analyst Dan Ives called the sell-off a "golden buying opportunity." Even if DeepSeek's claims are true, the analyst suggests that "no U.S. Global 2000 company" will pin their AI future on a Chinese start-up.

Nvidia chimes in

Nvidia CEO Jensen Huang waded into the debate, calling DeepSeek "an excellent AI advancement," saying these developments will fuel further AI adoption, increasing demand for its processors.

Astute investors will note that after Monday's shellacking, Nvidia is much cheaper. The stock is selling for around 47 times earnings, and while that's a premium, that's far below its three-year average of 82. Furthermore, analysts' consensus estimates predict Nvidia's earnings per share will hit $4.45 in fiscal 2026 (which begins later this month). That works out to just 27 times next year's earnings, a reasonable price considering the magnitude of the opportunity.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Danny Vena has positions in Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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