News Digest / Analysis & Ideas / DeepSeek AI's Rise Sparks Market Selloff: What Investors Need to Know

DeepSeek AI's Rise Sparks Market Selloff: What Investors Need to Know

Alex Vellor
08:53am, Tuesday, Jan 28, 2025
Photo by Steve Johnson on Unsplash.com

Shares of AI-related stocks, particularly chipmakers like Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ:AVGO), and AMD (NYSE:AMD), saw a sharp decline this week after the sudden surge in popularity of DeepSeek, a Chinese AI startup. DeepSeek’s app, which hit #1 in Apple's iPhone store, overshadowed even ChatGPT, though it didn’t make the top 10 on Google Play. This has raised questions about the AI industry and sparked fears among investors.

What is DeepSeek?

Founded in 2023 by hedge fund manager Liang Wenfeng in Hangzhou, China, DeepSeek has been making waves with its AI models. The company’s latest model, R1, released last week, is said to rival OpenAI’s ChatGPT in performance.

Notably, its V3 model, which debuted in December, was developed in just two months for under $6 million. This rapid development stands in contrast to the massive investments made by U.S. companies like OpenAI and Meta Platforms (META) in building their AI systems.

The speed and cost-efficiency of DeepSeek’s AI models have sparked concerns among investors. They worry that the startup’s success could undermine the financial assumptions that U.S. companies and investors have relied on for AI development. If DeepSeek can create competitive AI with such low costs, it could reshape how AI models are developed globally. This potential disruption is what’s driving the market selloff.

Impact on AI Stocks and the Market

The stock market felt the shockwave of DeepSeek’s success. The Nasdaq dropped over 3% on Monday, with AI-related stocks taking the hardest hit. Shares of major chipmakers like Nvidia, Broadcom, and AMD fell, alongside those of their international partners like Taiwan Semiconductor Manufacturing Company (NYSE:TSM). The PHLX Semiconductor Index (SOX) plunged more than 9%. Even energy stocks, which had soared on the belief that AI would drive increased demand, saw a drop.

While some sectors, like consumer staples, saw gains, the broader market sentiment was dampened by the fear of competition from DeepSeek and similar companies. This fear was compounded by the reality that DeepSeek’s rise may signal that AI development doesn’t require the expensive infrastructure that investors once believed was necessary.

Analysts Push Back on Fears

Despite the panic, not all analysts agree with the market’s overreaction. Bernstein’s Stacy Rasgon called the response “overblown” and maintained an “outperform” rating for Nvidia’s stock, suggesting that the selloff could present a buying opportunity. Citi analysts also backed Nvidia, believing that AI companies will continue to rely on its chips.

Analysts from Wedbush, however, were more skeptical about DeepSeek’s ability to challenge U.S. companies on a large scale. They pointed out that while DeepSeek’s models may be impressive for consumer use, building broader AI infrastructure is another matter entirely.

Summary:

DeepSeek’s rise underscores the rapidly evolving landscape of AI, where new competitors can emerge quickly and disrupt expectations. While some analysts caution that the recent market panic may be exaggerated, investors should keep an eye on how the competition between Chinese and U.S. AI companies unfolds.

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About The Author

Alex Vellor

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