A Blog by Jonathan Low

 

Jan 27, 2025

China's DeepSeek AI Causes Market Crash, Raising Questions About Tech Valuation

The problem of the eyewatering costs of AI for corporate users that have emerged in the past year are part of the reason that equity markets are crashing this morning. 

In the past year, there has been concern about the ruinously expensive investments required for AI, with little evidence that the promised productivity, operational and financial outcomes would follow. Even Goldman Sachs, usually a tech cheerleader, published an advisory, expressing skepticism and urging caution. So the sudden emergence of a considerably less expensive but comparably performing Chinese alternative has called into question both corporate AI investment levels and Big Tech valuations. The result may be a resetting of expectations and corporate approaches to how AI is implemented. JL

 Asa Fitch and colleagues report in the Wall Street Journal:

China's DeepSeek has sparked a freakout as Nvidia stock dove 12% and other US tech stocks tumbled (as) DeepSeek calls into question the driving force behind Big Tech for more than two years: that AI development requires huge amounts of expensive advanced chips. This AI push has added trillions of dollars in value to the stock market, most notably to Nvidia, whose chips have almost single-handedly powered existing major AI models. “The AI industry is embryonic. It's impossible to know how it will develop or what competition current winners might face even if you believe in its potential to drive future productivity. The stratospheric rise of DeepSeek reminds us of this.”

DeepSeek has sparked a deep freakout.

The Chinese artificial-intelligence upstart has trained high-performing AI models cheaply—and without the most advanced gear provided by Nvidia and others. That has pulled the rug from under global companies riding the AI wave, including chip makers, infrastructure suppliers and power stocks, as investors question the outlook for AI spending.

Nvidia and other U.S. chip stocks tumbled premarket, and futures pointed to one of the worst days for the Nasdaq-100 index in years. Bonds rallied, and bitcoin sank as investors sought safety.

The rethink comes as a busy week for earnings gets under way—with some of the biggest spenders on AI, such as Microsoft and Meta Platforms, among the companies due to update investors.China’s DeepSeek calls into question the driving force behind Big Tech for more than two years: that artificial-intelligence development requires huge amounts of expensive advanced chips.

This push has added trillions of dollars in value to the stock market, most notably to Nvidia, whose chips have almost single-handedly powered existing major AI models. Nvidia says more powerful chips will only advance AI further, with a future focus on robotics and autonomous vehicles.

DeepSeek showed it could produce an AI model—that some users say is on par with the best in the world—at lower cost, and without a large number of cutting-edge chips. That feat suggested Big Tech’s relentless spending on AI chips, which has driven semiconductor stocks skyward, could be in jeopardy.

Last week brought a $500 billion spending commitment from companies including SoftBank, Oracle and OpenAI to build data centers for OpenAI. Meta also said its capital expenditure would rise to between $60 billion and $65 billion as it also keeps spending on AI development.

“The problem is that the AI industry is embryonic,” a Deutsche Bank analyst wrote Monday. “And it's almost impossible to know how it will develop or what competition current winners might face even if you fully believe in its potential to drive future productivity. The stratospheric rise of DeepSeek reminds us of this.”

Not everyone is worried that a cheap Chinese model will shake Silicon Valley’s determination to keep spending. Wedbush analyst Dan Ives argued no major U.S. company will use a Chinese startup "to launch their AI infrastructure and use cases."

He said the current focus of AI is on enterprise usage and the broader infrastructure that requires. He projects $2 trillion of capital spending for this over the next three years, despite DeepSeek’s emergence.

One thing is for sure: Investors will seek answers from the tech giants reporting earnings this week, including Meta and Microsoft on Wednesday and Apple on Thursday.

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