This week’s market has been one for the ages. On Monday, Nvidia lost more in market capitalization than any stock in history. Given the historic rise in market capitalization over the past couple of years, this stands to reason. What caused the decline in market capitalization? It was the announcement that a competitor to the U.S.-based ChatGPT Large Language Model (“LLM”) from China, called DeepSeek, delivered a similar product with a fraction of the Nvidia chips used by ChatGPT.
While this reads like a bowl of alphabet soup to those of us who do not follow the latest technological trends, the important take away is that the demand for the most innovative, and expensive, chips from Nvidia may slow down. Given that Nvidia stock is owned by virtually every stock mutual fund in existence, there were a lot of investors who took this news as a clarion call to sell to reduce their exposure to the stock.
I don’t want to make more of the price action of stocks than the real news that sparked Monday’s volatility. In other words, short-term volatility obscures what we believe to be a positive development for long-term investors from recent announcements around artificial intelligence. If you are focused on the stock market hitting an air pocket, you will miss the longer term positive coming from it.
Many are calling this a “Sputnik Moment” for AI. As many of you recall, when the Soviets beat the U.S. to be the first country to launch a satellite into space, it sent shock waves around the world. It was a surprise because the U.S. was sure it was ahead in the “Space Race” but it was not. Most of the world was also sure the U.S. was ahead in the race for AI dominance….but maybe not.
While we know the U.S. ultimately won the race to land on the moon, we do not yet know if the U.S. will win the race for AI dominance. However, we are not sure that such a race exists in this world of AI. What really matters is how fast the cost of AI can be brought down to help propel commercial uses for AI technology. At this point, we believe what has happened is a huge step forward toward this goal rather than a huge step back for U.S. dominance. Rather than the cost to develop AI requiring billions of dollars, maybe it only requires millions of dollars.
It is important to frame the conversation to understand the impact of this step forward for AI. It is ultimately positive for the cost to come down rapidly to develop LLM models like ChatGPT and others. This will only serve to accelerate advances in other areas of AI development. It will also allow companies like Microsoft, Alphabet, Meta among others to shift billions of dollars in development budgets to other areas and away from LLM development. This could be a hugely positive step toward other more costly developments that might have been tackled many years down the road.
In conclusion, the selloff in stocks we experienced on Monday was followed by a decent bounce back on Tuesday. Will there be more volatility ahead? Absolutely. Are we still in the early stages of AI development with monumental advances in technology ahead of us? Absolutely. We see no threat to a broader selloff taking root.
We remain calm during this period and focus our attention on good quality companies that are well-positioned for growth in the AI-dominated future.
Thank you for your continued confidence in KIG.
Sincerely,
Kessler Investment Group, LLC
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