AI Stocks Plummet as Chinese Rivalry Raises Questions on Cost-Effectiveness
The AI industry took a significant hit on Monday as news of a potentially more cost-effective Chinese AI model sent shockwaves through the investment community. Chinese startup DeepSeek’s new generative AI model, R1, has been touted as a competitor to OpenAI, with analysts citing its models as more cost-effective.
A Shift in the AI Landscape
DeepSeek’s V3 model was reportedly trained for just $5.6 million, a fraction of the $100 million spent by OpenAI on its GPT-4 model. This stark contrast has raised questions about the Western world’s massive spending on AI infrastructure. As a result, AI chip giant Nvidia (NVDA) saw its stock plummet by as much as 15%, wiping out hundreds of billions from its market cap. Rival Advanced Micro Devices (AMD) dropped around 5%, while Broadcom (AVGO) plunged more than 13%.
Broader Market Impact
The ripple effect was felt across the broader markets, with the S&P 500 (^GSPC) down 1.6% and the tech-heavy Nasdaq (^IXIC) dropping 2.8%. Analysts warn that the performance of DeepSeek’s models could have a profound impact on US AI companies, potentially leading to a reevaluation of their data center buildout strategies.
A New Era of AI Competition
DA Davidson analyst Gil Luria notes that DeepSeek’s models are performing as well as the most advanced US models at a fraction of the cost. This could mean that US hyperscalers like Microsoft (MSFT), Google (GOOG), and others may be severely overinvesting in their data center buildout. Raymond James analyst Srini Pajjuri echoes this sentiment, highlighting the potential for companies to run AI models with minimal compute, reducing the need for massive data centers.
US AI Infrastructure Plans Under Scrutiny
The news comes as US President Donald Trump announces a $100 billion investment in US AI infrastructure, with plans to spend an additional $400 billion over the next four years. Meta (META) has also announced plans to significantly ramp up its capital expenditures to $65 billion in 2025. However, analysts are now questioning whether this level of spending is necessary in light of DeepSeek’s innovations.
Mixed Reactions from Wall Street
While some analysts see the DeepSeek news as a potential game-changer, others are more skeptical. Bernstein’s Stacy Rasgon argues that DeepSeek’s reported spending on its V3 model is likely underestimated and does not include costs associated with prior research. Citi analyst Atif Malik, on the other hand, believes that advanced AI chipmakers’ business will not come under pressure.
Earnings Season Looms
As Big Tech earnings season gets underway, investors will be watching closely to see how companies like Microsoft, Meta, and Tesla (TSLA) respond to the shifting AI landscape. One thing is certain – the AI industry is in for a wild ride.
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