Nvidia, the world’s second most valuable company, has been at the forefront of the artificial intelligence (AI) revolution, benefiting immensely from the rising demand for high-performance chips. However, as the company prepares to report its latest earnings on Wednesday, questions are mounting over whether its dominance in AI hardware is sustainable. The emergence of low-cost AI models, particularly those from China’s DeepSeek, has triggered uncertainty, leading investors to reassess the long-term demand for Nvidia’s expensive AI chips.

The Rise of DeepSeek and Investor Concerns

DeepSeek, a Chinese AI research firm, made headlines in January by unveiling models that purportedly rival their Western counterparts at a fraction of the cost. This development rattled the semiconductor industry, resulting in a staggering $593 billion market value loss for Nvidia—the largest single-day loss ever recorded by a U.S. company. Despite Nvidia’s strong performance in 2023 and 2024, DeepSeek’s advancements have raised concerns about whether high-end AI chips remain essential for companies seeking a competitive edge in AI development.

“Investors have been very concerned about DeepSeek and the impact that it will have on demand,” said Ivana Delevska, chief investment officer of Spear Invest, which holds Nvidia shares in an actively managed exchange-traded fund. The concern stems from the possibility that companies may opt for more affordable alternatives rather than continuing their reliance on Nvidia’s premium-priced hardware.

Nvidia’s Financial Outlook Amid Market Uncertainty

Despite these concerns, Nvidia’s revenue growth has remained robust. The company is expected to report a 72% increase in revenue to $38.05 billion for its fourth quarter, according to LSEG data. However, this marks the slowest growth rate in seven quarters, a sharp contrast to the triple-digit growth recorded in the previous five quarters.

For the first quarter ending in April, Nvidia is forecasted to see a 60% revenue surge. While this represents a continued strong performance, it reflects a deceleration compared to previous quarters. Analysts and investors are keen to see whether the company can still “beat and raise” expectations, as a positive earnings report would likely boost confidence in the stock despite ongoing concerns.

Big Tech’s Continued Investment in AI Infrastructure

While the rise of DeepSeek has led some investors to question the necessity of Nvidia’s AI chips, major tech firms remain committed to investing heavily in AI infrastructure. Companies like Microsoft, Meta, Google, and Amazon have all indicated plans to continue substantial capital expenditures (CapEx) in AI and data centers.

“The CapEx plans communicated by Meta, Microsoft, Google, and Amazon paint a very positive picture of the near-term demand backdrop for Nvidia,” said John Belton, a portfolio manager at Gabelli Funds, which holds Nvidia shares. These companies view Nvidia’s AI chips as integral to their long-term AI strategies, suggesting that demand for high-performance hardware is unlikely to collapse in the near future.

Challenges with Blackwell Chip Rollout

Nvidia’s Blackwell series, a next-generation AI computing system, is expected to play a crucial role in maintaining the company’s dominance in the AI chip market. Unlike previous product iterations, Blackwell shifts Nvidia’s strategy from selling individual chips to providing full AI computing systems that bundle GPUs, CPUs, and networking equipment. This transition, while promising, has introduced new challenges.

The rollout of Blackwell chips in the fourth quarter has helped boost revenue but has also led to margin compression due to the cost of ramping up production. Analysts expect Nvidia’s adjusted gross margin to shrink by more than three percentage points to 73.5% in the fourth quarter. Additionally, the production process for Blackwell has proven to be both costly and time-consuming, partly due to Nvidia’s reliance on Taiwan Semiconductor Manufacturing Company (TSMC).

TSMC, Nvidia’s key contract manufacturer, has struggled with expanding capacity for advanced packaging—a critical step in assembling high-performance AI chips. This bottleneck in the supply chain has delayed the production ramp-up and added further pressure on Nvidia’s ability to meet growing demand.

Blackwell’s Early Challenges and Future Prospects

Beyond manufacturing hurdles, Blackwell’s launch faced initial design flaws and low chip yields, complicating its rollout. Nvidia has since addressed these issues, and in November, the company announced that Blackwell’s revenue would surpass initial projections of several billion dollars in the fourth quarter. However, the complexity of launching an entirely new set of products means that Nvidia may not deliver the same level of outperformance that investors have grown accustomed to.

“Blackwell has been a complicated set of products to launch,” noted one analyst. “With the magnitude of outperformance that investors have become used to, Nvidia’s delivery could be smaller this time around, just given some of these dynamics with the Blackwell launch.”

The Road Ahead for Nvidia

Despite the uncertainties introduced by DeepSeek and the challenges associated with the Blackwell rollout, Nvidia remains a formidable player in the AI semiconductor space. The company’s ability to innovate and adapt will determine whether it can sustain its leadership position in an increasingly competitive market.

For now, Nvidia’s future remains closely tied to the broader AI spending landscape. If major tech firms continue their aggressive investment in AI infrastructure, demand for Nvidia’s high-end chips is likely to persist. However, if alternative AI models prove to be viable at significantly lower costs, Nvidia may need to rethink its pricing and product strategies to maintain its competitive edge.

Conclusion

As Nvidia prepares to release its latest earnings report, all eyes will be on how the company addresses concerns surrounding AI chip demand. While major tech firms continue to invest heavily in AI, the emergence of cost-effective alternatives like DeepSeek could reshape the industry’s trajectory. Nvidia’s response to these challenges—both in terms of innovation and strategic adjustments—will be critical in shaping its long-term success.