Nvidia's stock is crashing by more than 15% this morning as a rival AI software from China threatens the spending of big Tech on products from Nvidia wiping hundreds of billions of dollars of wealth from retail investor accounts but the big question remains why is Nvidia stock crashing and is this a buying opportunity I'll address both of those questions.
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Nvidia stock is down by over 15% on the back of this news Nvidia stock has lost hundreds of billions of dollars of market capitalization in just one day in fact if you look at nvidia's stock price performance over the last 5 days it's fallen from a market cap around 3.6 trillion all the way down to a market cap of 2.95 trillion large numbers indeed and it highlights the riskiness of investing in tech stocks like Nvidia of course I'm disappointed in this development because I've had Nvidia stock rated as one of my top stocks to buy in 2025 in fact I had it rated as a top stock to buy last year as well 2025 is getting off to a rough start for Nvidia stock investors but why is Nvidia stock down by so much today well the semiconductor Market is leading a broader selloff in tech stocks after deep seek which is which ignited a lowcost approach to developing AI models and it reignited concerns that Us big us companies have poured too much money into developing artificial intelligence since the Chinese firm appears to provide a comparable performance to Western chatbots at a fraction of the price a fraction of the price.
So if you haven't been following along big tech companies like Microsoft alphabet meta platforms Amazon Etc have been pouring tens of billions of dollars into developing their AI capabilities that's partly what's fueling nvidia's success up to this point is these large tech companies are buying up everything Nvidia can produce so this news threatens those purchases that's why the stock price is down because investors are making a connection thinking to themselves well if this company from China can de develop this technology at a fraction of the cost can US tech companies mimic that result and thereby develop the similar technology at a fraction of the cost and if they're developing it at a fraction of the cost the large percentage of that cost goes to Nvidia.
so that means that money that's going to Nvidia will not be as much and so nvidia's future cash flows are threatened and if you remember when I did my discounted cash flow valuation of Nvidia part of the reason why investors are so attracted to Nvidia stock is because because its free cash flows are expected to Surge over the next decade rising from 46 billion in free cash flow in 2024 my model and my forecasts which incorporate Wall Street analyst forecast suggest that the company's free cash flow could rise in the next 5 years in 2029 to reach $451 billion up from $46 billion so a roughly 10x increase in Nvidia free cash flow is expected over the next 5 years.
But if Wall Street feels that nvidia's customers are going to reduce spending this forecast in free cash flow growth could shrink and if this forecasted free cash flow shrinks then nvidia's valuation also shrinks and so that's the big risk that's what has Nvidia stock crashing by more than 15% on the day of the announcement and if you look at nvidia's thirdd quarter which is its most recent quarter if you look at its data center Revenue compared to total revenue now data center revenue for NVIDIA is where it Mak sales for artificial intelligence categories um so this is where Nvidia would be hurt as a result of this news if indeed companies like Amazon and Microsoft and alphabet reduce their spending in the data center segment this is where Nvidia will be hurt and it's a big part of nvidia's business.
$31 billion in data center revenue from a total of $35 billion so it's almost 90% of the company's Revenue so the market is right to react this way to this kind of news because it threatens a large part of nvidia's business and a large part of where Nvidia as business is forecast to grow over these next 5 years over these next 10 years so given this decline Nvidia stock is now trading at a forward price to earnings of 27 which signals to me that it's still undervalued additionally.
if you look at my discounted cash flow valuation model Nvidia stock still looks relatively cheap compared to my intrinsic value per share calculation which forecasts that Nvidia is free cash flows will grow significantly over the next decade and more and the intrinsic value per share is around $300 I also did several scenarios of Nvidia in this discounted cash flow where its growth rate could be as low as 3% instead of the 5% in my base case longer term and even in that scenario it's intrinsic value would be $270 per share so what's my conclusion is Nvidia stock a buy on this dip is this a buying opportunity well I think it's too soon to come to the conclusion that tech companies like Microsoft and Amazon and alphabet are going to reduce their spending in these data centers optimized for AI because of this news from Deep seek my usual reaction to big moves in the Market is that stock markets overreact both on the upside and on the downside and so this downside reaction I think is an overreaction to this news but it does bring me to higher alert on Nvidia stock I'm already paying close attention to Amazon Microsoft and all these companies that are spending money on data centers and the recent news if you remember I covered with micros soft and they said they're increasing their Capital expenditures to $80 billion in 2025 up from $50 billion in 2024 so they actually increased their capex budget by 60% similar story with meta platform similar story with uh Amazon and we're going to get earnings releases in the next week where these large tech companies are going to announce their quarterly results and of course Wall Street analysts are going to ask this question to those big tech companies they're going to ask this question to Microsoft to Amazon to alphabet and say look you guys are spending this much money to develop AI when this Chinese company did it at a fraction of the cost explain yourselves and that's when we'll get the really critical information to digest and to make a decision whether or not this is really going to impact Nvidia right if Amazon and Microsoft and alphabet all come out and say look yeah that's great what they did over there but they wouldn't have been able to do that without the initial Investments and they may have made great progress to start with but they're going to get stuck because they don't have this technology whatever the reasoning might be if those large tech companies say we're not going to change our spending plans we're going to continue developing and even if they can develop this techn techology at a fraction of the cost the offsetting factor might be huge as well the offsetting factor could mean if you think about this in the next step the second derivative of this outcome if you can develop this kind of AI technology at a lower cost and these companies were already spending so much money on AI at the higher price.
imagine how much they will want to spend on AI if they they can develop AI at a lower price imagine all the extra use cases that now become financially viable because the return on investment is so much better and so you're going to have this initial reaction where there's fear that these large tech companies are going to decrease their budgets for AI but then if you think about it usually what happens with technology is a lower price to develop technology creates increasing demand for the technology so now you can develop these capabilities at a lower price and if you can develop these capabilities at a lower price now your imagination starts to think more broadly and think more expansively and you start to consider man I can do this now because the cost is lower I can develop this new technology because the cost is lower and the return on investment makes sense so the whole calculus will change and it'll create more opportunities for new investment that now make sense from a return on invested Capital Prospect so I think it's too soon to make any kind of conclusive change in my recommendation.
so I'm still reiterating that I still think Nvidia stock is a buy but put a asterisk there to be more cautious because the big tech companies Microsoft Amazon alphabet will be rep reporting over the next couple of weeks and that's when we'll get definitive answers as to if they're going to change their spending plans as a result of this news.