- DeepSeek model seen as cost-effective on less-advanced chips
- Technology shares slumped Monday on concerns over valuations
Chinese startup DeepSeek has shaken the belief that only a few firms with huge budgets can compete in the artificial intelligence field — potentially challenging an investment case that rewarded the biggest players with rich valuations.
Investors are digesting the implications of DeepSeek’s breakthrough products offering comparable performance at seemingly a fraction of the cost — and what this means for US tech behemoths that have funneled billions of dollars into cutting-edge AI processors.
“What makes Monday’s tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error,” said David Bahnsen, chief investment officer, The Bahnsen Group. “Excessive valuation always becomes a problem, eventually, but fundamental news becomes a heightened problem when it is combined with excessive valuation.”
Over the past 24 months, most of the Nasdaq 100 Index’s gains have come from a handful of AI names, inflating valuations in the process. Prior to Monday’s open, forward earnings multiples for Nvidia Corp., Microsoft Corp. and Amazon.com Inc. swelled past 30 times, while the tech-heavy benchmark itself traded at 27 times — higher than its 10-year average, according to data compiled by Bloomberg.
Valuations have been staying high as analyst estimates for projected profits have risen slower than stock prices. Any hit to the bottom-lines of these companies could quickly render these valuations untenable.
“With many investors heavily exposed to AI’s biggest players, disruption in the sector could ripple through portfolios,” said Morningstar’s Kenneth Lamont. “While DeepSeek itself isn’t publicly investable, one way to guard against such risks may be diversifying away from the so-called “Magnificent Seven” tech giants — perhaps by reallocating to equal-weighted strategies.”
The turnaround is particularly severe given Wall Street was welcoming AI investments as recently as Friday, when Meta Platforms Inc.’s stock hit a new high after the firm unveiled a capital expenditure target that blew past estimates.
The market moves also follow the Donald Trump administration’s high-profile announcement last week that saw OpenAI, SoftBank Group Corp. and Oracle Corp. pledge a $100 billion joint venture called Stargate to build out data centers and AI infrastructure projects around the US.
Worries that big-tech firms may not need to spend as much to train their AI models have sunk the shares of Nvidia, which has been Wall Street’s biggest AI beneficiary over the past two years. The stock plummeted 11% as of 9:36 a.m. In New York — poised to shed more than $390 billion in market value. Meanwhile, ASML Holding NV — supplier of some of the world’s most advanced chipmaking machines — dropped as much as 12% in Amsterdam.
DeepSeek “provides a wake up call and somewhat of a question mark on how much needs to be spent in order to build a model, and whether quite the level of CapEx we have been seeing is really required,” said Ben Barringer, global technology analyst at Quilter Cheviot.
Some urged caution. “While DeepSeek’s achievement could be groundbreaking, we question the notion that its feats were done without the use of advanced GPUs,” Citigroup analyst Atif Malik wrote in note, referring to graphics processing units.
DeepSeek’s breakthrough shows that training costs can be “way lower” for smaller AI models that can handle some specific tasks, said Nori Chiou, an Investment Director at White Oak Capital Partners. Still, these models won’t be replacing bigger fundamental models anytime soon, he said. “Investors are primarily looking for a reason to lock in profits, especially after last week’s positive AI news.”
Top Tech News
- Chinese startup DeepSeek’s eponymous AI assistant rocketed to the top of Apple Inc.’s iPhone download charts, stirring doubts in Silicon Valley about the strength of America’s lead in AI.
- Chinese artificial intelligence startup DeepSeek rocked global technology stocks Monday, raising questions over America’s technological dominance.
- Bitcoin and other cryptocurrencies tumbled as the emergence of a new Chinese artificial intelligence model triggered a global selloff in riskier assets.
- Meta Platforms Inc. plans to invest as much as $65 billion on projects related to artificial intelligence in 2025, including building a giant new data center and increasing hiring in AI teams, Chief Executive Officer Mark Zuckerberg said.
- President Donald Trump’s executive order creating the Department of Government Efficiency makes billionaire Elon Musk subject to conflict-of-interest laws, while also granting him access to a vast trove of federal data with immeasurable value.
Earnings Due Monday
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Written by: Subrat Patnaik and Henry Ren — With assistance from Michael Msika @Bloomberg
The post “Tech Giants Get Reality Check as China AI Startup Upends Stocks” first appeared on Bloomberg