Why Nvidia Stock Rallied on Tuesday

Shares of Nvidia (NASDAQ: NVDA) surged higher on Tuesday, after taking it on the chin Monday. The maker of graphics processing units (GPUs) used for artificial intelligence (AI) applications gained as much as 7.2%. As of 1:30 p.m. ET, the stock was still up 7.1%.

Investors have had a day to digest the news about reported AI developments in China -- and cooler heads are beginning to prevail.

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On the heels of a rout

Nvidia stock was crushed yesterday following reports that Chinese AI start-up DeepSeek developed an AI model that delivered comparable results to existing chatbots at a fraction of the cost. The model, dubbed R1, reportedly used far fewer computing resources and was developed using older, less advanced AI chips.

Some investors were concerned this could tank demand for Nvidia's top-shelf processors, and the stock plunged 17%, wiping nearly $600 billion from its market cap.

Many on Wall Street believe the selling has simply gone too far. After digging into the data, Baird analysts are "skeptical" about reports that less advanced chips were used in R1's development. They further believe strong demand for Nvidia's flagship Hopper and Blackwell processors will continue.

Tigress Financial upgraded Nvidia to a strong buy and increased its price target to $220, which represents potential upside for investors of 86% compared to Monday's closing price. The analysts posit that demand from data centers will remain strong. Nvidia is the leading provider of data center GPUs and stands to benefit from this ongoing trend.

Wedbush analyst Dan Ives called the sell-off a "golden buying opportunity." Even if DeepSeek's claims are true, the analyst suggests that "no U.S. Global 2000 company" will pin their AI future on a Chinese start-up.

Nvidia chimes in

Nvidia CEO Jensen Huang waded into the debate, calling DeepSeek "an excellent AI advancement," saying these developments will fuel further AI adoption, increasing demand for its processors.

Astute investors will note that after yesterday's shellacking, Nvidia is much cheaper. The stock is selling for 47 times earnings, and while that's a premium, that's far below its three-year average of 82. Furthermore, analysts' consensus estimates predict Nvidia's earnings per share will hit $4.45 in fiscal 2026 (which begins later this month). That works out to just 27 times next year's earnings, a reasonable price considering the magnitude of the opportunity.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.