Nvidia Stock Plunges Amid Fears of Open-Source AI Threat, but Analysts Urge Caution

China's DeepSeek, an AI startup, sparked a tech sell-off on Monday as investors fretted over the potential disruption posed by its open-source large language model. The Nasdaq (^IXIC) plunged 3%, with Nvidia (NVDA) leading the decline. NVDA's stock plummeted 16.9%, wiping out a staggering $589 billion in market cap.

The ripple effect extended across the broader tech sector. Chip stocks, including Broadcom (AVGO), Lam Research (LRCX), KLA (KLAC), and Marvell (MRVL), declined on Monday. Technology giants Microsoft (MSFT) and Alphabet (GOOGL) fell 2% and 4%, respectively, adding pressure ahead of fourth-quarter earnings.

However, analysts caution against overreacting to the initial panic. Bernstein's Stacy Rasgon dismissed the market's reaction as "overblown," emphasizing that DeepSeek's development does not spell "doomsday for AI infrastructure."

"I believe there is still a significant demand for compute capacity in artificial intelligence," Rasgon stated. "Innovations like DeepSeek could potentially free up capacity, which would be absorbed by other AI applications."

Futurum's Daniel Newman echoed these sentiments, citing the Jevons Paradox. The economics concept suggests that increased efficiency in resource utilization often leads to increased consumption.

"The market is missing this," Newman warned. "More efficient AI models could lead to expanded use, allowing companies to build more cost-effective models and drive higher earnings per share."

Microsoft CEO Satya Nadella also referenced the Jevons Paradox, tweeting that increased AI efficiency would likely result in greater AI adoption.

"Spending on AI continues to accelerate, and we don't see this trend ending," added Rasgon.

Wall Street's initial panic appears to have subsided, as Big Tech stocks, including Microsoft, closed significantly higher than their lows. Amazon and Meta gained 0.3% and 1.9%, respectively.

Principal Asset Management's Seema Shah downplayed fears of a market correction, emphasizing the positive macro environment.

"I don't believe we're at a point where we can start talking about correction territory," Shah said. "The economic climate remains favorable for earnings across most sectors."

While the Nasdaq closed down 3%, the S&P 500 (^GSPC) declined 1.5%. The Dow Jones Industrial Average (^DJI) reversed earlier losses, ending the day up 0.65%.