Why Nvidia Stock Skyrocketed Today

Shares of Nvidia (NASDAQ: NVDA) spiked Tuesday. The company's stock gained 8.9% as of market close. The move up comes as the S&P 500 and Nasdaq Composite gained 0.9% and 2%, respectively.

Nvidia's stock felt some relief after a major sell-off on Monday that was spurred by a new AI entrant, DeepSeek.

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DeepSeek stunned the market

AI stocks were hammered as the market reacted to DeepSeek, a Chinese AI model. Its newest version was just released, and despite lacking the hardware and funding its U.S. counterparts enjoy, DeepSeek's team was able to create an AI model that rivals those made by OpenAI and Amazon. Investors are worried that demand for U.S. hardware could weaken as a result. Nvidia's stock fell nearly 20% in a day on the news.

Fears may be overblown

After the initial shake-out, more voices calling for temperance rose to the surface. While it is entirely possible that a more efficient model could lead to weakening demand for Nvidia's chips, it is far from a guarantee. In fact, it could have the opposite effect: It could lead to increased demand. There is a concept in economics dubbed the Jevons Paradox that may apply here -- that is, increased efficiency in a market leads to more demand, not less.

If DeepSeek's model leads to AI models in general taking a leap forward in efficiency, I believe that AI applications will become more useful and ubiquitous, and thus demand will increase. We will see how this pans out, but the initial panic has subsided, and today saw Nvidia's stock recover somewhat.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.