The Sixteen Trillion Dollar Question

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The $16 Trillion Question 

As of January 24, 2025, the combined market capitalization of Nvidia, Inc. NVDA and the other major AI infrastructure companies was nearly $16 trillion.

That market cap is based on expected demand for hardware to fuel the AI boom. But what if all of that hardware won’t be needed? What if we can have AI without most of it? That’s the $16 trillion dollar question raised by the emergence of a Chinese AI startup called DeepSeek. They released their AI model this week, reportedly built with only $6 million in funding, and American tech luminaries like Marc Andreessen were blown away by it.

Deepseek R1 is one of the most amazing and impressive breakthroughs I've ever seen — and as open source, a profound gift to the world. 🤖🫡

— Marc Andreessen 🇺🇸 (@pmarca) January 24, 2025

Two Possibilities Here

There are two possibilities here: 

1. DeepSeek really did manage to essentially replicate what Open AI has done with ChatGPT, without a $100 million or more worth of expensive equipment by companies like Nvidia. 
2. DeepSeek secretly is using that equipment, but can’t disclose it due to export restrictions. 

If the answer is 2. than Friday’s price action will have been a mild hiccup in our tech bull market; if the answer is 1., then that bull market is over. Investors will begin to radically reprice Nvidia and other AI infrastructure companies, after dramatically lowering their capex expectations. 

Investment Implications 

If you are at all risk-averse, you should probably hedge. Here are a couple of inexpensive ways you can hedge Nvidia against a >20% drop. 

If you are an aggressive investor or trader, you might consider betting against Nvidia. We did that on Friday morning, and exited half of our position for a 200% gain later in the day. That was one of our two successful trade exits this week. 

1. Puts on Nvidia ( NVDA -0.09%↓ ). Bought for $0.75 on 1/24/2025; sold (half) on the same day for $2.25. Profit: 200%.
2. Calls on Kratos Defense and Security Solutions, Inc. KTOS. Bought for $1.25 on12/12/2024; sold (final two thirds) at $5.65, on 1/22/2025. Profit: 352%.

If you’d like a heads up when we place our next trade, you can subscribe to our trading Substack/occasional email list below. 

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we’re using that for our occasional emails now).