Startup DeepSeek launched a free AI assistant last week that it says uses less data at a fraction of the cost of incumbent services and by Monday DeepSeek’s assistant had overtaken US rival ChatGPT in downloads from Apple’s app store.
The news led the tech-heavy Nasdaq to fall more than 3%, with leading AI chipmaker Nvidia its biggest drag with its shares tumbling more than 17%.
Nvidia was on track to lose more than $US600 billion ($NZ1.05 trillion) in stock market value, the deepest-ever one-day loss for a company on Wall Street, according to LSEG data, and more than double the previous one-day record loss, set by Nvidia in September last year.
The Nasdaq’s next-biggest drag was chipmaker Broadcom, down more than 18%, followed by ChatGPT backer Microsoft, off 2.3%. Google parent Alphabet fell 3.4%.
The Philadelphia semiconductor index tumbled more than 10%, eying its biggest percentage drop since March 2020.
US equity declines followed a selloff that started in Asia, with Japan’s SoftBank Group 9984.T finishing down 8.3%, and moved through Europe where ASML fell 7%.
“If it’s true that DeepSeek is the proverbial ‘better mousetrap,’ that could disrupt the entire AI narrative that has helped drive the markets over the last two years,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“It could mean less demand for chips, less need for a massive build-out of power production to fuel the models, and less need for large-scale data centres. However, it could also mean that AI becomes more accessible and help kickstart the development of a wide array of useful applications.”
The hype around AI has powered a huge inflow of capital into equities in the last 18 months, inflating valuations and lifting stock markets to new highs.
As recently as Wednesday last week, US AI-related stocks had rallied sharply after President Donald Trump announced a private-sector plan for what he said would be a $US500 billion investment in AI infrastructure through a joint venture known as Stargate.
Since then, SoftBank has announced a $US19 billion commitment to help fund the Stargate joint venture whose other backers include ChatGPT developer OpenAI and Oracle, whose shares were down more than 14% on Monday.
In their flight from risk, investors sought out safe-haven government bonds and currencies. The benchmark US Treasury 10-year yield fell to 4.54%, while currencies like Japan’s yen and the Swiss franc rallied against the dollar.
DEEPSEEK ‘SPUTNIK MOMENT’
After the release of the first Chinese ChatGPT equivalent, made by search engine giant Baidu, there was widespread disappointment in China over the gap in AI capabilities between US and Chinese firms.
But the apparent quality and cost-efficiency of DeepSeek’s models changed this, with Silicon Valley executives and engineers showering praise on DeepSeek-V3 and DeepSeek-R1.
Little is known about the small Hangzhou startup behind DeepSeek, whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, based on records.
Its researchers wrote in a paper last month the DeepSeek-V3 model, launched on January 10, used Nvidia’s lower-capability H800 chips for training, spending less than $US6 million.
The DeepSeek-R1, released last week, is 20 to 50 times cheaper to use than OpenAI’s o1 model, depending on the task, according to a post on DeepSeek’s official WeChat account.
Marc Andreessen, the Silicon Valley venture capitalist, said in a post on X on Sunday that DeepSeek’s R1 model was AI’s “Sputnik moment,” referencing the former Soviet Union’s satellite launch that marked the start of the space race in the late 1950s.
“DeepSeek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen – and as open source, a profound gift to the world,” he said in a separate post.
However, Daniel Morgan, senior portfolio manager at Synovus Trust Company, which owns almost a million Nvidia shares, called Monday’s selloff an over-reaction.
Morgan said that because DeepSeek’s AI model is for use on mobile phones and PCs rather than data centres, it competes with ChatGPT, Meta Platforms and Alphabet’s Gemini.
“The real money in AI is providing the chips for the data centres from the likes of (Nvidia), Advanced Micro Devices and Broadcom,” said Morgan. “Overall, I view the AI tech selloff today as an opportunity to add high-quality tech shares on weakness.”
However, Nvidia was on track for a record daily loss on Monday, last down more than $US24 at $US117.69.
The stock, now down more than 12% for the year to date, rose 171% in 2024 and about 239% in 2023 to trade at 56 times the value of its earnings.
In comparison the Nasdaq trades at a multiple of 16 to the value of its constituents’ earnings, LSEG data showed.
Among other stocks, Vertiv Holdings which builds data centre infrastructure, slumped more than 30%.
Investors also sold off shares of power utilities, which had rallied recently on hopes for a massive surge in demand from power-hungry data centres needed to develop AI technology.
