Key points:
China’s DeepSeek and US Tech Dominance:
DeepSeek, a Chinese AI startup, has rapidly gained attention with its advanced
models, potentially challenging the dominance of established U.S. tech giants
like OpenAI and Nvidia.
Cost-Effectiveness and Open-Source Strategy:
DeepSeek challenges the traditional, capital-intensive AI development approach
by using less advanced hardware to create cost-efficient models. Their
open-source strategy promotes faster innovation and wider adoption, potentially
reducing the competitive edge of U.S. firms that rely on proprietary systems.
Investment Implications:
This development could raise concerns about the high valuations of the U.S.
tech sector that has been the key driver of broader U.S. market gains.
DeepSeek, a Chinese artificial intelligence (AI) startup,
has recently emerged as a significant player in the AI landscape, drawing
considerable attention from global investors and industry leaders. Founded in
2023, DeepSeek has rapidly developed advanced AI models that rival those of
established U.S. tech giants.
DeepSeek unveiled a free, open-source large-language
model in late December that it says took only two months and less than $6
million to build, using reduced-capability chips from Nvidia called H800s.
DeepSeek’s app is now one of the most downloaded app on Apple’s App Store, and
Bloomberg searches for “DeepSeek” have surged, reflecting heightened global
interest and investor focus.
Sustainability
of US Tech Dominance
DeepSeek’s AI models, like the DeepSeek-R1, have
demonstrated superior performance compared to prominent U.S. models such as
OpenAI’s GPT-4 and Meta’s LLaMA 3.1. These achievements span across various
benchmarks, including complex problem-solving, mathematics, and coding,
positioning DeepSeek as a key player in the global AI arena.
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.
The Cost Debate: Does More Spending Equal
Better AI?
By developing cutting-edge AI models with less advanced
and more cost-efficient hardware, DeepSeek challenges the heavy investments
U.S. tech companies are pouring into high-cost AI infrastructure.
Reports suggest that DeepSeek-R1’s API costs just $0.55
per million input tokens and $2.19 per million output tokens, compared to
OpenAI’s API, which costs $15 and $60, respectively. This raises critical
questions about whether the traditional capital-intensive approaches are
sustainable in the long run.
Open Source: The Innovation Multiplier
Taking a different path from many U.S. companies that
tightly guard their AI models, DeepSeek has adopted an open-source strategy,
openly sharing its code and training methodologies.
This approach could drive faster innovation and broader
adoption globally, potentially diminishing the competitive advantage of U.S.
firms reliant on proprietary systems such as OpenAI’s GPT-4 or Google’s
Bard. Yann LeCun, Meta's chief AI scientist, remarked that DeepSeek's
success underscores the potential of open-source models to surpass proprietary
ones.
High Valuations: The Constant Pain Point for
U.S. Big Tech
U.S. 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, even minor disruptions, such as DeepSeek proving advanced AI can be
built without top-tier chips, could 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.
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.
Geopolitical Chess: Beating Chip Restrictions
DeepSeek’s success raises another pressing question: how
did they do it despite U.S. export controls? The Biden administration’s
semiconductor restrictions were designed to limit China’s access to
high-powered chips like Nvidia’s H100s. Yet DeepSeek has managed to thrive,
suggesting either a workaround or that these controls aren’t as restrictive as
intended.
This could have major implications for both U.S. policy
and investor sentiment toward Chinese tech. If companies like DeepSeek can
innovate despite sanctions, the narrative around China's technological
dependence on the U.S. may shift dramatically.
What Does This Mean for Investors?
Evaluate U.S. AI Capex and Margins:
High costs and stretched valuations could put U.S. AI leaders under pressure,
especially if DeepSeek’s cost-efficient model gains traction. Watch for
commentary during the Q4 earnings season that kicks into high gear this week
with Meta, Microsoft, Tesla and Apple reporting.
Watch for Value in Chinese Tech:
DeepSeek’s success could spark renewed interest in China’s AI sector, which
remains undervalued relative to U.S. peers.
Diversify Within and Beyond AI:
While AI remains a critical growth driver, investors should consider broader
diversification across sectors like renewable energy, semiconductors, and
healthcare—industries where innovation is also creating opportunities for
outsized returns.
Spread Across Regions:
DeepSeek’s rise underscores the importance of geographic diversification.
Allocating capital to Europe and Asia, for instance, could help balance
portfolios over the long term, especially as non-U.S. markets build competitive
tech ecosystems.
Brace for Policy Shifts: If
U.S. export controls fail to restrict Chinese innovation, expect policymakers
to explore new tactics—potentially creating volatility in the semiconductor
space.
