Nvidia's Rebound Faces Skepticism

Fund manager Dan Niles has cast doubt on Nvidia’s attempt to recover from Monday’s significant stock drop, cautioning that the AI chip giant’s troubles may not be over yet.

Nvidia’s shares plummeted 16.9% after Chinese startup DeepSeek unveiled its open-source large language model, reportedly developed in just two months for $6 million—an amount significantly lower than what industry leaders typically invest. This revelation has raised fresh concerns about the long-term financial commitment of major tech firms to artificial intelligence, putting pressure on Nvidia, a dominant player in AI chips.

“Nobody questions Nvidia’s leadership in chips,” Niles, founder of Niles Investment Management, told CNBC on Tuesday. “The real question is how much capital expenditure is needed for different AI processes, from pre-training to inference.”

Following Monday’s historic loss, which wiped out over $595 billion in market value—the largest single-day market cap decline in U.S. history—Nvidia’s stock rebounded nearly 9% on Tuesday. However, Niles remains cautious.

“I think investors should be very careful about assuming this is the bottom,” he told CNBC’s Sri Jegarath and Chery Kang on “Squawk Box Asia.”

Niles believes Nvidia’s stock could experience further declines if revenue growth slows from its current 50% pace to a range of 20-30%. While a temporary bounce-back is possible, he warns that the stock could still face considerable downside risks.

Nvidia Responds to DeepSeek’s Challenge
Despite the market reaction, Nvidia welcomed competition from Chinese AI firms. In a statement to CNBC, a company spokesperson described DeepSeek’s R1 model as “an impressive AI development,” suggesting that Nvidia still sees strong demand for its GPUs in the evolving AI landscape.

The Microsoft Factor
Beyond Nvidia’s performance, Niles is also monitoring how DeepSeek’s rise might affect the AI ecosystem, particularly Microsoft’s relationship with OpenAI and Nvidia.

Microsoft has been a key financial backer of OpenAI, investing nearly $14 billion in the ChatGPT creator. As one of the largest AI spenders and Nvidia’s biggest customer, Microsoft’s approach to AI investment is crucial.

However, Niles predicts Microsoft’s capital expenditures on AI, which have been growing at rates of 70-80%, could level off by June.

“The big question is return on investment,” he noted. “So far, they haven’t seen the payoff, and we’ll have to see how this plays out.”

As uncertainty lingers in the AI sector, investors are closely watching how Nvidia navigates these challenges and whether the recent stock dip signals a temporary setback or a longer-term correction.