Investors React to DeepSeek's AI Launch, Impacting Technology Stocks

This image depicts the DeepSeek mobile app as seen in Beijing.

On Monday, technology stocks faced significant sell-offs, particularly affecting companies such as Nvidia and Oracle. This downturn followed the recent introduction of a cost-effective artificial intelligence model from the Chinese startup DeepSeek, which has raised concerns about the dominance of Western AI companies.

DeepSeek launched a free assistant last week, claiming it requires less data and operates at a fraction of the cost compared to existing models from leading players. This innovation may signal a pivotal shift in the required investment levels for artificial intelligence technology.

Futures for the Nasdaq 100 index dropped nearly 4 percent, indicating it could face its largest single-day decline since September 2022 if these losses persist. Meanwhile, S&P 500 futures fell 2 percent. In pre-market trading, shares of AI chip manufacturer Nvidia decreased by 10 percent, Oracle lost 8 percent, and AI data analytics firm Palantir fell 7 percent.

Interestingly, DeepSeek’s app surpassed the popular U.S. rival ChatGPT in terms of downloads on the Apple Store, suggesting it could represent a viable, lower-cost alternative in the AI market. This development has sparked questions regarding the ongoing sustainability of spending and investment in artificial intelligence by major Western companies like Apple and Microsoft.

The negative trend in AI-related stocks was evident from Tokyo to Amsterdam, with significant declines noted across various technology firms.

Jon Withaar, a senior portfolio manager at Pictet Asset Management, commented on the situation, saying, "We still don’t know the details and nothing has been 100 percent confirmed regarding the claims, but if there truly has been a breakthrough in reducing training costs from over $100 million to the suggested $6 million, this would be very beneficial for productivity and AI users due to lower costs making the technology more accessible."

The recent hype surrounding artificial intelligence has led to substantial investment in equity markets over the past 18 months. Investors have heavily financed AI technologies, causing company valuations to soar and helping stock markets reach record highs.

Nvidia has experienced remarkable growth, with its stock price increasing by over 200 percent in the last year and a half. Currently, the company trades at 56 times its earnings, contrasting sharply with a 53 percent rise in the Nasdaq, which trades at 16 times the value of its constituents' earnings based on data from LSEG.

Much remains unknown about DeepSeek, the small startup based in Hangzhou. Researchers there indicated in a recent study that their DeepSeek-V3 model, released on January 10, utilized Nvidia's H800 chips for its training process, costing under $6 million — a figure echoed by Jon Withaar.

However, the H800 chips are not the most advanced option available. Originally, they were developed as a lower-capability alternative due to restrictions on sales to China, but subsequent U.S. sanctions led to a complete ban on their use.

DeepSeek's 'Sputnik Moment'

Silicon Valley venture capitalist Marc Andreessen described DeepSeek's R1 model as AI's "Sputnik moment," referencing the launch of the Soviet Union’s satellite that initiated the space race in the late 1950s. He emphasized in a post on X that "DeepSeek R1 is among the most impressive breakthroughs I've ever encountered—and as open source, it represents a profound gift to the world."

In broader market reactions, Europe's ASML, which supplies companies like Taiwan's TSMC, Intel, and Samsung, saw a nearly 11 percent drop. In Japan, SoftBank Group’s shares fell over 8 percent after announcing a $19 billion initiative to fund Stargate, a joint data center venture with OpenAI.

Big Tech companies have significantly increased their investments in AI development, leading to high levels of optimism regarding potential returns that have inflated stock valuations. With the introduction of new technologies that challenge the belief in U.S. superiority in AI, market experts are beginning to question the capital expenditures of major tech players.

Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, reflected on this uncertainty, noting, "The notion that the most advanced technologies in America, like Nvidia and ChatGPT, are the most advanced globally could be challenged in light of these developments. However, he argued, it might be too early to draw any conclusions at this stage."

Investors, AI, Stocks