January 27th may very well be the day that the world changed for NVIDIA Corp. (NVDA) and all hardware-related AI names.
DeepSeek. Expect to hear this name non-stop from this day forward. DeepSeek is a small, unknown Chinese company that has scaled their open source AI model – one that smart people have legitimized and, in some cases, given rave reviews – with 45x LESS the amount of GPUS it has taken Open AI to scale their models. IF TRUE, this has significantly bearish implications for NVIDIA and all things AI hardware related.
Noted VC Andreessen is also impressed:
“Deepseek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen,” Silicon Valley venture capitalist Marc Andreessen wrote in a January 24 X post.
Stocks top when the fundamentals still look rosy. This is exactly where NVIDIA is in its earnings cycle with expectations firmly ensconced for big revenues and profits for years to come.
Well, the stock has been churning for months, with subtle signs of exhaustion dating back to last Spring. To wit, note how the stock's RSI line has been flagging since last Spring, forging a series of lower highs and lower lows:
Coming into today, NVDA's 200-day SMA is $121.58. The 10% gap lower in NVDA suggests to us a seminal top is in for the stock. A break below the 200-day on a closing basis would confirm that not only the top is in but that a new down-trend is at hand for the stock.
Needless to say, IF NVDA decisively breaks its 200-day, all other AI related hardware names, as well as, related thematic trades are also at risk of breaking down decisively.
Here is a very thoughtful piece a very smart client sent to us over the weekend explaining why NVDA is a short:
In particular, the Opticals are trading at nosebleed levels. We had exposure to the Opticals via a small long in Credo Technology Group (CRDO) coming into today. We evened out that trade by going short Astera Labs Inc. (ALAB). We will only be short ALAB after the opening. ALAB is tremendously overvalued and will see a huge drop in its business IF A.I. hardware CAPEX spend gets decimated.
In such a scenario, ALAB could careen to $20 by the end of the year.
Note how ALAB's RSI lagged miserably, relative to price, when it made new highs:
Turning to the ultimate "weak sister" Super Micro Computer Inc. (SMCI), it has been lagging for multiple quarters now. Make no mistake. IF AI CAPEX hardware goes into a CAPEX Winter, not only will SMCI's revenues turn down significantly, we think the company has existential risk. Its margins will be DECIMATED. It will lose a ton of money in such a scenario, as its margins will be truncated tremendously due to serious pricing pressures.
SMCI has been expanding its capacity wildly the last two years. A perfect storm. Watch out below is $20 cracks in the coming weeks/months. We are not short yet, but will be once we get a borrow.
We also shorted a very small starter position in Oklo Inc. (OKLO). Forget the need for all things nuclear if there is a dramatically lower need for AI hardware, as we would need 20x-40x less power than anticipated.
We think OKLO can head back to the teens quickly in the near-term, as there are NO REVENUES AND EARNINGS COMING until the 2030s and, yet, it trades for a $5B market cap.
One final note: Since starting this missive at 4:30 a.m. NVDA has quickly breached its 150-day SMA on ONLY 15M shares. We think its 200-day at $121.58 will be in play as early as today, especially as we believe the stock will trade 700M-1B shares today.
Importantly, THE MAGNITUDE of the gap lower in NVDA today suggests a seminal moment is at hand, one where Top Tier Inflections typically manifest themselves. Thousands of funds went long NVDA the past few quarters as it topped out. It will take them weeks and months to distribute these positions SHOULD the 200-day SMA break:
I think big investors will still support NVDA after the open. As such, a move back toward $130 seems like better than even odds.Unfortunately, for the bulls, what was previously big support at $129-$130 should NOW PROVE TO BE AN AREA OF RESISTANCE going forward. We think odds favor rallies failing at this area today, as the size of the gap lower today is significant, one that indicates a seminal change in trend may be at hand:
On the flip side, we think Meta Platforms Inc. (META) would stand to benefit from the potential need for significantly less CAPEX needed to scale its AR/VR/AI initiatives, as the company would become immensely more profitable in a scenario where its models could scale with significantly less GPUS from NVIDIA and other AI-related hardware.
We will never know just how many GPUS were utilized by DeepSeek to scale their LLM. Maybe they sourced thousands of GPUS illegally. It is certainly possible.
We will never know. As a result, we are keeping our risk SMALL on this short basket of AI-names.
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Disclosure: We are currently short NVDA, ALAB and OKLO and plan to short SMCI as soon as we can get a borrow this morning. We are also long SOXS as a play on the SMH heading lower. We reserve the right to change our positioning at a moment's notice without alerting you to any such change in positioning; either in real time or after a change in positioning has taken place.
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