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AI stocks got slammed as the China app challenged cost and demand assumptions. (0:15) Bond yields plunge and cash moves to safety. (4:08) Analysts see buying opportunity. (5:01)
The following is an abridged transcript:
DeepSeek dropped a depth charge into Wall Street’s waters today. But it didn’t completely deep six the dip buyers.
In a nutshell, hype around China’s recently-introduced DeepSeek R1 self-learning AI model threatened many investor assumptions about the AI equity trade.
Nomura strategist Charlie McElligott says, DeepSeek is shock-disruption-agent “where the sudden introduction of such a cheap-yet-completely viable AI tool which is self-guiding its own training and built via reinforcement learning .without standard controls (MAGNITUDES lower operational cost not requiring the massive semiconductor spend of the newest and most expensive chips) is threatening the prior assumptions on the AI ecosystem, with massive implications on Pricing Power, CAPEX/Spending trends and market Valuations of the current hierarchy of leadership in the space.”
Seeking Alpha tech editor Chris Ciaccia has more analysis, including whether DeepSeek’s claim that is cost less than $6 million to develop can be trusted:
“Artificial intelligence stocks dropped sharply this morning led by Nvidia (NASDAQ:NVDA), Broadcom (AVGO), Microsoft (MSFT), and the like, all down at least 6%.
Nvidia and Broadcom are down 11% and 12% respectively. There’s this concern that the model from this Chinese AI Lab DeepSeek ,that was released over the past few weeks, could significantly cut AI computing costs drastically.
In the research paper, DeepSeek said its training costs were $5.6 million, whereas OpenAI’s last model costs at least a $100 million
So, that’s what you’re starting to see here, even though if there are concerns about that $5.6 million, whether that’s actually true or not.
Personally, I think this is a little bit of a buying opportunity because, like I said, there is a concern about whether that $5.6 million number is actually true.
And if you actually read the research paper, DeepSeek talks about how it’s a bunch of costs excluding several different things, including inferencing, and a couple other things that are related to it.
And as I mentioned in the story that I wrote this morning, you’ve also seen the Chinese government come out with huge numbers requested for AI spending over the next few years.
I think in their policy initiative for this year, they requested at least a $137 billion funding over the next 5 years. So, if they’re requesting a $137 billion in funding, and DeepSeek is claiming that to train one it only costs $5.6 million, the two of those don’t add up. There’s something that’s a little bit off.
I would also wonder about the fact that this was released on the same day that president Trump was inaugurated. Maybe there might be some political aspects to it.
It doesn’t pass the smell test in my opinion. And I think that’s why you started to see a bunch of sell-side analysts come out and say that this is a buying opportunity for AI socks.”
What’s that mean for trading today? Growth is getting hammered, while defensive sectors like Consumer Staples (XLP) and Healthcare (XLV) are in the lead.
The Nasdaq (COMP.IND) is tumbling as Nvidia (NVDA) and other AI-tied names see a 10% haircut. It’s down -3.5% in volatile trading, but futures had been down more than 4%. The S&P (SP500) is faring much better, down -2%, while the Dow (DJI), which has been shunned missing out of the momentum trades and growth names, is back in fashion and fighting to stay in the green.
McElligot says the lack of breadth in stocks from such a prolonged period of leadership via a small group of companies can now pose “an outright stability risk,” with huge megacap weightings equaling a problem on an equity index level “thanks to crowded single-name ownership amongst institutions and retail.”
As expected in a risk-off move, cash is moving to the safety in bonds and rates are tumbling. The 10-year Treasury yield (US10Y) is also off lows, but still down back around 4.55%.
Other markets are also feeling the DeepSeek contagion. Quantum computing stocks are selling off, infrastructure and nuclear stocks, expected to supply the massive power needs of data centers, are sinking and crypto is having a typical risk-off reaction with bitcoin (BTC-USD) at multi-day lows.
On the flip side, ADRs of China’s Aurora Mobile (JR) more than doubled after it added DeepSeek’s AI model to its platform.
And stocks overall saw some buying appetite after DeepSeek suddenly announced that it was restricting new registrations to those with China mainland phone numbers.
The company said: “To ensure continued service, registration is temporarily limited to +86 phone numbers. Existing users can log in as usual. Thanks for your understanding and support.”
In more fodder for dip buyers, you heard Chris Ciaccia talk about bullish analyst calls, so we’ll make this a special DeepSeek Wall Street Research Corner.
Wedbush analysts called the selloff a “golden buying opportunity,” adding while “the model is impressive, and it will have a ripple impact, the reality is that (Magnificent) 7 and US tech is focused on the (artificial general intelligence) endgame with all the infrastructure and ecosystem that China and especially DeepSeek cannot come close to in our view.”
TD Cowen analysts say they “see little reason DeepSeek’s innovation should lead to a weaker near-term demand environment.”
Societe Generale strategist Manish Kabra cited his colleagues at Bernstein, who simply think that DeepSeek did not “build OpenAI for $5M.” They agree DeepSeek’s models look fantastic, but they do not think they are miracles and do think the resulting Twitterverse panic over the weekend seems overblown.
And Oppenheimer analyst Edward Yang says the DeepSeek model could be “counterintuitively” bullish for semiconductor equipment companies by “lowering AI entry costs at the LLM/application layer; expanding the pool of economical buyers at the infrastructure layer beyond megacap hyperscalers; clarifying AI ROI through cheaper, more capable agents for broader applications; and intensifying competitive urgency in generative AI, spurring greater investment.”
Looking to the reaction from the Seeking Alpha analyst community, in the bear camp: James A. Kostohryz, investing group leader of Successful Portfolio Strategy, says: “The implications are clear. P/E ratios for most AI-related US tech firms will plummet. I expect that P/E ratios for the tech sector overall should contract by at least 30% over the course of the next 12 months.”
And Eugenio Catone says the “AI euphoria seems to have come to an end, and it is rather curious that all this is happening just before the release of the earnings reports. Better-than-expected results may alleviate this moment of panic, but I think this news is bound to have an impact over time.”
In the bull camp, Oakoff Investments, leader of the Beyond the Wall Investing Group, upgraded Nvidia to Buy “viewing the dip as a buying opportunity amid market panic.”
“DeepSeek’s success, using Nvidia’s H800 GPUs, highlights Nvidia’s critical role in AI, suggesting increased future demand for its GPUs from U.S. tech firms,” they said.
For my part, I asked ChatGPT if DeepSeek would replace it and said – in a very company man sort of way – that the way ChatGPT interacts sets it apart.
Read the full article here
