Shares of Nvidia (NVDA) faced a steep decline on Monday after the release of an advanced artificial intelligence model from Chinese startup DeepSeek raised questions about AI spending and competition.

DeepSeek’s new AI model, R1, launched last week and has quickly drawn attention for its performance. The model appears to rival offerings from major U.S. tech firms like OpenAI and Google, despite operating on less powerful and fewer chips. This development has led U.S. investors to reconsider the outlook for American AI companies and their reliance on Nvidia’s hardware.

A Shift in Market Sentiment

Nvidia has been a key beneficiary of the AI boom over the past two years, with its stock and earnings soaring as major tech companies, including Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN), heavily invested in its cutting-edge AI systems. However, DeepSeek’s success has raised doubts about the necessity of such massive expenditures on high-end GPUs, especially if similar results can be achieved with less powerful hardware.

By Monday, these concerns culminated in a significant sell-off, with Nvidia’s shares plunging nearly 17%. This marked the largest single-day decline for the company since the Covid-19 market crash in March 2020. The sell-off erased approximately $589 billion from Nvidia’s market capitalization, making it the largest single-day market cap loss in history.

Analyst Reactions

Despite the dramatic reaction, Wall Street analysts remain cautious in their assessments. While many expressed skepticism about DeepSeek’s claims, the uncertainty surrounding its long-term impact has left room for debate.

Citi analysts, for instance, doubted whether DeepSeek’s achievements were truly possible without leveraging the most advanced chips currently available. They reaffirmed their "buy" rating on Nvidia, citing confidence that U.S. AI leaders are unlikely to shift away from Nvidia’s state-of-the-art GPUs in the near term.

What’s Next for Nvidia and the AI Market?

The emergence of DeepSeek’s R1 highlights the evolving competitive landscape in AI technology. As new players challenge the dominance of established giants, the industry may face increasing scrutiny over costs and efficiency. While Nvidia’s leadership in the GPU market remains intact, this week’s events underscore the potential for disruption and the volatility that comes with it.

For now, Nvidia’s future still appears tied to the growth of AI, but investors will likely keep a close eye on further developments from DeepSeek and other emerging competitors. Whether Monday’s sell-off marks a turning point or just a temporary setback remains to be seen.