Chinese AI start-up DeepSeek has quickly emerged as a global contender, unveiling an advanced large-language model built in just two months for under US$6 million.
DeepSeek’s meteoric rise has wiped nearly $1 trillion off Nvidia’s market value and dealt a significant blow to its peers, dragging the tech-heavy Nasdaq 100 down by nearly 3 per cent, and casting serious doubt on the dominance of the Magnificent Seven.
Besides DeepSeek’s undeniable competitive edge, its real threat lies in its bold claims of cost-efficiency, with the start-up divulging its model operates far more cheaply, needing significantly fewer chips to deliver the same sophistication as its US rivals.
According to Charu Chanana, Saxo’s chief investment strategist, DeepSeek’s true danger lies in its challenge to the traditional, capital-intensive AI development model.
“Even if DeepSeek does not maintain its current level of popularity, this development serves as a reminder that competition in the global AI arena is intensifying, and Nvidia may not be in the pole position forever,” Chanana said in a market note.
“By developing cutting-edge AI models with less advanced and more cost-efficient hardware, DeepSeek challenges the heavy investments US tech companies are pouring into high-cost AI infrastructure.
“Reports suggest that DeepSeek-R1’s API costs just US$0.55 per million input tokens and US$2.19 per million output tokens, compared to OpenAI’s API, which costs US$15 and US$60, respectively. This raises critical questions about whether the traditional capital-intensive approaches are sustainable in the long run.”
And as investors start to scrutinise the costly bets made by giants like Nvidia, the lofty valuations of AI hardware providers are coming under fire, sparking investor concerns for the Magnificent Seven.
The seemingly exaggerated value of US tech stocks has been lamented by market pundits for some time. Overall, US tech companies are trading at premium valuations, with major AI players like Nvidia, Microsoft and Alphabet commanding forward P/E multiples far above historical averages.
With these stocks priced for perfection, Chanana explained that even minor disruptions, such as DeepSeek proving advanced AI can be built without top-tier chips, weigh heavily on share prices.
“For Nvidia, in particular, its role as a key supplier of AI chips makes it vulnerable if demand for its high-end products wanes,” she said.
In contrast, Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand.
“DeepSeek’s rise could spark renewed investor interest in undervalued Chinese AI companies, providing an alternative growth story,” Chanana said.
End of AI narrative?
Reacting to DeepSeek’s entrance, Betashares senior investment strategist, Cameron Gleeson, suggested it’s “a little early” to declare the end of the AI narrative but advised investors to look beyond big tech when considering US market exposure.
Regarding Nvidia, in particular, Gleeson said DeepSeek’s market shake-up is a “timely reminder” of the volatility of the firm’s stock.
“The company is up an eyewatering 90 per cent over the past year. In fact, the top 10 single day stock falls (in terms of market value destruction) are all Mag-7 stocks – eight of which are Nvidia alone,” Gleeson said.
He suggested US financials, boosted by a strong Q4 2024 earnings season, and software stocks, poised to benefit from AI’s evolution, as promising alternatives for investors.
“The development of more efficient AI training, is at face value, a net negative for the hardware (semiconductor industry) and longer term could be a very strong net positive for software, for example Meta and Salesforce were up overnight,” Gleeson said.
“End-user AI application development becomes cheaper and therefore has wider applications, so anyone who owns the customer by providing AI embedded solutions wins.”
In fact, Gleeson likened DeepSeek’s impact on US stocks to the tussle between hardware and software from the dotcom boom.
“At one point, Cisco routers (hardware) were seen as the gateway to the internet, and propelled Cisco to becoming the largest company in the world. But in the 2000s it became clear that software (search, social, etc) would become the dominant players in the internet age,” he said.
Similarly, AMP’s Shane Oliver told InvestorDaily that AI’s shift towards commoditisation mirrors the fate of traditional computer chips and helps explain the downturn of dotcom stocks.
“DeepSeek, which is apparently providing competitive AI outcomes and much lower cost, may be a sign that the same is happening now. Its early days and maybe DeepSeek can’t do all that it claims but it does question the rich valuations of US tech stocks like Nvidia and whether all of the AI investment will be justified,” the chief economist said.
“This, in turn, risks a further correction in US tech stocks – although it won’t necessarily go in a straight line and may take a while to play out.”
Like Gleeson, Oliver noted that while tech stocks may stay under pressure, this could be offset by a rotation into other sectors of the US and global markets.
Renewable energy is a sector Nigel Green, the CEO of DeVere Group, expects to flourish, with companies at the intersection of AI and clean energy expected to receive a sizeable boost.
“DeepSeek’s innovation is not just a technological milestone – it’s a wake-up call,” Green said.
“Disruption creates opportunities for those who can see beyond the noise.
“Energy and AI markets are entering a new phase, and investors who align with these changes now will be positioned to benefit from the next wave of growth.”
China shines
Beyond stock market concerns, Chanana pointed out China’s unexpected success in bypassing chip restrictions, signalling potential challenges for US policies under Donald Trump’s leadership.
Namely, DeepSeek emerged despite the Biden administration’s semiconductor restrictions, which were designed to limit China’s access to high-powered chips like Nvidia’s H100s.
“This could have major implications for both US policy and investor sentiment toward Chinese tech.
“If companies like DeepSeek can innovate despite sanctions, the narrative around China’s technological dependence on the US may shift dramatically,” Chanana said.
Responding to the news of DeepSeek’s rise to prominence, President Trump called the development “positive,” but cast doubt on its veracity.
“If it’s fact and if it’s true, and nobody really knows if it is, I view it as a positive,” Trump said.
“The release of DeepSeek AI from a Chinese company should be a wake-up call for our industries that we need to be laser focused on competing to win.”
Trump said that Chinese leaders praised the US for having the world’s brightest scientists, adding that if China developed cheaper AI technology, US companies would follow suit.
“We always have the ideas. We’re always first. So I would say that’s a positive that could be very much a positive development. So instead of spending billions and billions, you’ll spend less, and you’ll come up with, hopefully, the same solution,” Trump said.
